It is no secret that the billing component of a business is essential. It is the conduit that keeps the financial stream of a company healthy and running efficiently, whether it’s a one-time purchase and billing or the subscription billing activity that powers many SaaS businesses.
There are several different accounting systems available in the market today that have been developed or modified and in place to help facilitate billing and invoicing. Which of these accounting systems are right for an individual business, though? That really depends on the specific business, its product, its customer count and its fiscal capacity to invest in specific billing products.
As you begin to sort out the different accounting platforms, it’s important to first look at the three components of primary accounting systems.
The ledger system
Ledger systems account for historical transactions, those that have already taken place. In essence, it provides a rear-view look on financial transactions.
This historic view is generally focused on cash-oriented transactions, and is primarily used in smaller organizations, or those that offer solo purchases, as opposed to purchases on a recurring basis.
The ledger system is limited in the fact that it captures transactions at a given point in time. It does not have the forward-thinking approach of its much more robust counterpart, the ERP (Enterprise Resource Planning) system.
And while a ledger system is ideal or some situations, it does have other limitations as well.
- First, there is not a lot of functionality in that the information surrounding customer records is very static.
- It is also ineffective in overseeing revenue or managed revenue.
The ERP system
On the other end of the spectrum, you have the ERP systems. These are far more sophisticated systems that are built by modules such as ledgers, supply chain inventory, etc. Some ERPs do have a billing engine, and they can also manage multiple data tables.
However, ERPs are much more expensive than the ledger system option, and are not something that most companies—particularly small- and medium-sized businesses (SMBs)—can afford.
The customer relations management
While not an accounting system, the CRM is a popular component that can be tied into an ERP system. The CRM manages the customer data and gives businesses a view of where leads and potential customers are in the pipeline between sales opportunities and those that you can close and convert into a customer.
However, there is a significant gap that emerges between the opportunity that you are closing and the point that you are able to record it in the GL, or general ledger. This is where a billing system comes into play. A billing system groups information for customers, produces invoices, creates business reports, collects and records payments.
Since most SMBs cannot feasibly employ an ERP system, the option that is most cost-effective is the ledger system. Some businesses use Excel and an accounting system like QuickBooks.
While this combination may seem economically practical, the manual data entry usually leaves a lot of room for errors and inefficiencies.
How do these billing systems impact regular billing and subscription billing?
There are two types of billing that SMBs can encounter:
1. Regular billing.
With regular billing, which is generally a one-time purchase, all you’re doing is taking the customer-related data from your CRM. Then, on the payment side of the data, an invoice is created.
2. Subscription billing.
Subscription billing is most often associated with SaaS companies. With subscription based businesses, an invoice is generated on a regularly-scheduled (recurring) basis. Additionally, there may be other pieces, like usage or variable considerations, that need to be accounted for.
With either type of billing, the general procedure is the same. A business takes the order that’s been closed and enters into the billing system and fulfillment system. They need to put in details such as:
- Payment terms
- Products ordering
- Number of pieces ordered
If you do not have a ledger based billing system and want to do subscription billing, you then need to do journal entries manually to defer certain portions of the payments. But you have to set up the deferred revenue appropriately so it will be noted correctly from a revenue recognition perspective.
Plus, you have to make sure the customer details are correct, that the invoice is going to the right person and referencing the right product.
If done manually, subscription billing is a very extensive process, particularly for those SMBs that don’t have an automated recurring billing module.
They take the order, put the details associated with it into Excel, figure out the what the deferred revenue is going to be, add the contact information, go through the various products, then build a worksheet to show how each individual transaction will be recognized over time in the form of a waterfall.
They must also figure out payments and how the client is going to pay the bill, bringing in additional manual complexities and increasing the chances for human error.
On a monthly basis, those companies then need to generate the invoice in accordance with that Excel spreadsheet.
It’s a manual, ugly process.
Subscription management and recurring billing platforms fill in that gap
There is a middle of the road option for SMBs that allows them to bridge that gap between the CRM and the ledger system without having to go all the way up to an ERP. That option is a robust subscription management and recurring billing platform. These recurring billing platforms integrate seamlessly with your CRM and accounting system to meet complex billing scenarios.
With these points in mind, here's a quick reference chart that shows how a powerful subscription management and recurring billing platform like Fusebill can help you do billing right by integrating with an accounting software like QuickBooks.
Click here for more information on best practices for taking advantage of both Fusebill and your accounting system while retaining accuracy and data integrity.