Subscription has always existed in the name of rentals or memberships with traditional limits to industries like magazines, health clubs, and so on. Nevertheless, in the modern world, it is almost everywhere – starting from music, films, cars and ending with co-working spaces.
This is the new thinking and the change in economics around buying versus subscribing, which will only grow. According to the latest research, the subscription economy is predicted to grow more than 18% per year, starting from 2022. This made important to ensure Dynamics 365 is capable of enabling customers to the shift in the economy and provide out-of-the-box solutions to handle subscription contracts.
Traditional sales order and invoicing, available in Dynamics, has focused on the AR trade, but it does not reflect the challenge of reallocating revenue as per the accounting standards such as ASC 606 and IFRS 15. This has led to companies utilizing reports and offline spreadsheets to perform the complex reallocations manually with only monthly entries.
With the recent accounting requirements, some error activity has to be recast to a gap-based set of figures. Until subscription, billing, and invoice, those order lines are meant to have one discrete event – posting your revenues or single account only once. However, in the subscription billing scenario, revenue has to be spread over two or more periods.
Without a subscription billing feature, the multiple posting events over a period is lacking. Businesses must manually track the calculations necessary to defer or accrue the revenue, which is not scalable even for the smallest of businesses.
Customers and sales might compel the organization to build, let’s say, the equipment with consulting services together under the same line item invoice. Yet the selling company must reallocate their revenue as per ASC 606, which has already been mentioned above, between the consulting services and the hardware.
Common Business Use Cases for Subscription Billing
The subscription billing module is targeting specific business models, and here are a couple of business types that will love to utilize the module:
- Companies with subscriptions that provide software, physical items, storage rentals, or recurring fees for equipment rentals;
- Companies that have milestone billing for the equipment installations, service completions, or other professional services;
- Companies that have usage-based billing, i.e. billing based on the professional hours provided, consumption or usage of data, and so on;
- In addition, companies that have deferrals to build an item annually but need to recognize equal amounts of revenue each month over the contract term.
Lastly, another use case for companies that need to reallocate their revenues, be it because of the IFR standards or the ASC standards, or the internal accounting requirements, such as there could be scenarios of bundles and kits that are solved by the organizations or the companies, and they required to have a further breakdown of accounting for their royalties, commissions or other internal purposes.
Subscription Billing Features
Understanding the need and the complexities involved, MS team inttroduces brand new subscription billing offering, included as part of the Dynamics 365 Finance app to meet the needs of the subscription economy where subscription-based revenue is your direct/tertiary revenue source. The list of high-level features includes:
- Subscription billing schedules;
- Deferred revenue;
- Accruing unbilled revenue;
- Revenue reallocation.
Subscription Billing Module
As part of the product that’s in Finance and Operations, the subscription billing functionality is lit up as a new menu item. Effectively the module is sort of three modules in one and are as follow:
- Recurring contract billing – a core aspect of the module that’s keeping track of customer contracts doing recurring billing over a period of time;
- Revenue and expense deferrals – that’s handling cases where customers might be billed ahead of time, but for generally accepted accounting principles, that revenue may not be recognizable as revenue until a future period. The functionality will allow those deferrals to occur;
- Multiple element revenue allocation – ability to reallocate revenue to comply with accounting standards globally.
These three modules can be used either in tandem or individually.
Recurring BIlling Variations
There are specific concepts related to recurring billing, including multiple subscription variations fulfilled through an application:
- First comes frequency of billing, which allows teams to renew contracts automatically creating recurring weekly/monthly billing;
- Second comes pricing, which allows teams to bill customers based on standard trade agreements, set custom pricing and tiered pricing as well as escalate pricing if needed;
- Third comes type of item, which allows teams to set type be it simple or usage/milestone-based items.
There are three types of items:
- Standard Items
- Usage Items, which may include consumption items, reading items, and usage data entities. This may be applicable to
- Professional Service Providers (hourly billing);
- Training Service Providers (based on training service providers billing);
- Advertising Agencies (billing based on a number of social media views/clicks);
- Learning Management System (LMS) Providers (LMS billing);
- Utility Companies (billing based on meter reading.
- Milestones Items, which include percentage allocation, variable amount, and percentage of completion.