Recognition of Revenue for Subscription Model

Challenge

GrowthLab was introduced to a company within the gaming and e-sports industry that was looking for a more elevated and proactive approach to their financial management. One of their main issues for approaching GrowthLab was due to incorrectly recorded numbers that flowed through their P&L and Balance Sheet that stemmed from their working papers.

One of the challenges that arose was the infancy of the gaming and e-sports industry which forced a steep learning curve for many of the businesses operating in this field. Particularly, the main challenge that businesses face in this industry is revenue recognition due to the array of revenue models each business uses. A standard practice to help with this issue is a detailed form of systems and controls, which is something we immediately focused on implementing. 

Solution

The bulk of the accounting work with this company came from the revenue recognition schedules… making sure all their payments were properly recognized and in accordance with accounting principals. Due to the different revenue streams and subscription types, there were multiple moving pieces to make sure were organized in the working papers. As with any subscription-based business, the revenue needs to be realized monthly, even though the subscription is often-times paid all up-front. 

This situation often causes a large gap in the accrual vs. cash P&L, which can cause a laundry list of issues if not tackled up front. On top of this, not only can the P&L be off, but this can trickle to your tax returns whereby the filings are done incorrectly if you’re not properly managing the subscription schedules. 

Results

Due to COVID, this company had experienced a low-point in their revenue, which allowed us to focus on the foundation of the accounting and financial management systems as things turned around. Now, as sports opened up, the company is growing tremendously and all of their subscriptions are being recorded properly so they have a true sense of where they are making and losing money. 

One piece of financial advice for someone starting in this industry is to make sure you set up your systems and working papers properly at the earliest stage possible. No matter what industry, make sure you've thought through the working capital requirements and always having an eye towards cash… even if your revenue is growing.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.