Having an adequate revenue recognition system in place is critical to accurate financial reporting for every business. Not only does it drive accurate financial statements, but it also supports regulatory compliance, investor confidence, and more.
But, due to the nature of how business works in the marketing industry, there are a number of factors, such as payment timing, discounts and rebates that can affect revenue recognition. We look into some of these challenges and how marketing agencies can best handle them.
Revenue recognition challenges in the marketing industry
Overcoming revenue recognition challenges specific to the marketing industry requires careful consideration when it comes to the timing of revenue recognition and rebates. It is important to consult with a CPA or finance expert to ensure compliance in this regard. Below are some of the challenges marketers should be aware of and how to address them.
1. Accounting for multiple outputs
Marketing agencies often provide a range of services to their clients. These can range from advertising campaigns to website development, social media management, content or video creation, and more.
While services may be billed as part of a comprehensive package or offered as separate deliverables, this can create a challenge in the revenue records of marketing businesses. Knowing which of your services sell more may be difficult to do at a glance when a marketing business recognizes bundle sales without identifying the single service in the financial records. This not only poses difficulty for internal company records, but also for compliance when making submissions to the IRS.
2. Timing of revenue recognition
Accounting for multiple outputs can also complicate the revenue recognition records of marketing agencies.
Revenue recognition differs when using cash vs. accrual accounting methods. With the cash accounting method, revenue is recognized when cash is received from customers. It focuses on the actual inflow of cash and does not consider the timing of providing goods or services. The accrual accounting method recognizes revenue when it is earned, regardless of when cash is received.
If a company makes over $25 million in sales for three consecutive years or has any inventory, the Internal Revenue Service requires using the accrual-based method. Marketing agencies that fall into this category for sales, will be faced with a challenge as the timing in terms of revenue recognition can be complex, especially when considering long-term contracts or ongoing services that come into play in the marketing industry.
Marketing services often involve ongoing campaigns that span over multiple reporting periods, and in some instances may have various deliverables, each with its own revenue recognition criteria.
3. Accounting for discounts
Marketing agencies often provide discounts or rebates as incentives to loyal clients or to those that purchase multiple packages. This can pose further challenges to estimating accurate amounts and transaction timing, when accounting for each line item that makes up the total revenue within the marketing business.
How to handle revenue recognition challenges
- Allocate revenue per individual sale item: To aid marketing businesses in understanding their holistic revenue landscape, so they can better report on where they make the most sales within their business, it may be beneficial to identify the separate performance obligations within client contracts and allocate revenue according to their individual selling prices. This would mean identifying the individual line items in a bundle contract sale.
- Recognize revenue for each separate item: Once individual sale items can be identified, revenue can be recognized appropriately according to the accounting method the company uses – if it is the accrual method, your accountant would have to calculate to split the lump sum amount across the various months within which the money is earned. This would require precise evaluation and accounting software geared for the marketing industry, but it would make revenue recognition within the business more accurate and reliable for tax and compliance purposes.
- Calculate discounts as revenue reduction: The most reliable means of calculating discounts would be to allocate it to each deliverable based on their individual selling price. This means that instead of accounting for one bulk package discount, each item should be discounted individually to ensure accuracy when offering discounts, and to still showcase the bread and butter for the business in their reports. It is important to retain relevant documentation for discounts, and their qualifying approval process in relation to the company policy – this will aid to ensure accurate revenue recognition and protect your business in the event of an IRS audit.
Overcoming revenue recognition challenges can be a daunting task for marketing agencies. Not only do they have to ensure stellar outputs for their clients, but they also need to ensure regulatory compliance with their financial reporting processes.
It is essential for marketing businesses to consult with a CPA to ensure the correct finance software tools and processes are in place as effective revenue recognition is crucial for the financial transparency and compliance of marketing agencies.
Our CPAs are experts in the field. We offer accounting and software solutions to achieve help marketing businesses achieve their financial goals.
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