When to Use Invoice-Based Revenue Recognition

Let’s review some common business needs and whether they’re ideal for invoice line-based revenue recognition

Full Revenue Recognition from Invoice Lines

To recognize revenue on the invoice line in full, apply a rule with an invoice-based, full distribution method to the product. Salesforce Billing creates a revenue schedule upon invoice posting. The revenue schedule contains one revenue transaction for the invoice line’s full amount. The revenue schedule sets its Full Recognition Date field based on the revenue distribution method’s settings — either the invoice line start date or end date.

For example, a company wants to recognize revenue upon invoicing for a one-time, $120 hardware purchase. They could use the following setup, which results in a revenue schedule with one revenue transaction for the full $120.

• Revenue Recognition Rule
  • Create Revenue Schedule?: Yes
• Revenue Recognition Treatment
  • Revenue Schedule Creation Action: Invoice Posting
• Revenue Distribution Method
  • Type: Invoice
  • Distribution Method: Full Recognition
  • Full Recognition Date: Invoice Line Start Date or Invoice Line End Date
  • Revenue Transaction Creation Process: Automatic

Pro Rata or Ratable Revenue Recognition from Invoice Lines

When recognizing revenue pro rata, the revenue distribution method has a Distribution Method field set to Daily or Monthly rather than Full Recognition. On the first invoice posting, Salesforce Billing creates a revenue schedule with revenue transactions corresponding to the amount of the invoice line, over the period of the invoice start and end dates. The revenue schedule has values for its Revenue Start Date and Revenue End Date, rather than a full recognition date. When Salesforce Billing creates more invoice lines for that order product, it adds revenue transactions to the same revenue schedule when the invoice lines post.

For example, a company wants to recognize revenue for a subscription-based software service, purchased for a term of 1 year at $10 per month. You could use a full-recognition rule to create one revenue schedule and a revenue transaction for the full $120. However, they may also want to report revenue as it becomes recognizable over the course of the deal, otherwise known as pro rata, or ratable recognition. The following setup results in a revenue schedule with 12 transactions each for $10. Salesforce Billing creates each transaction when its corresponding invoice gets posted.

• Revenue Recognition Rule
  • Create Revenue Schedule?: Yes
• Revenue Recognition Treatment
  • Revenue Schedule Creation Action: Invoice Posting
• Revenue Distribution Method
  • Type: Invoice
  • Distribution Method: Monthly
  • Revenue Schedule Term Start Date: Invoice Line Start Date
  • Revenue Schedule Term End Date: Invoice Line End Date
  • Revenue Transaction Creation Process: Automatic

Recognize Revenue from Invoice Lines on an Amendment

Recognizing revenue from an amendment quote’s invoice lines will produce the same results as a net new deal. Salesforce CPQ and Billing handle all the adjustments necessary for the amendment process are handled at the order level. Usually, the amendment order product is grouped with the original order product into the same invoice line, resulting in one revenue schedule.

On a software product using the same pro rata rule described above, a customer decides to add a license. The total price for the purchase rises to $20 per month. While you’ll have separate orders and order products for the two licenses, you can still invoice them on the same invoice line, depending on the product’s billing rule amendment settings. In this case, Salesforce Billing doesn’t make another revenue schedule. Instead, the amount of the revenue transaction generated each month increases to $20.

Forecasting Revenue from the Order Product and Recognizing Revenue from the Invoice Line

You can also make a rule for recognizing revenue at the order product and invoice line levels at the same time. Use this type of rule to separate revenue pipeline forecasting from the actual revenue reporting process. This type of rule has two revenue recognition treatments, each associated to its own revenue distribution method. As a result, Salesforce Billing makes two revenue schedules for each product purchased: one upon order product activation, for forecasting, and another upon invoice line posting, for reporting.

For example, a company wants to recognize revenue for a software purchase upon invoicing. They also want to use the order product to forecast the revenue that will be generated. Let’s say the subscription software was sold for 12 months at $10 per month. You can use the following setup to create two revenue schedules, both with 12 revenue transactions for $10 each. One schedule is associated to the order product, and the other is associated to the invoice line. This distinction lets the company track both revenue forecasting and reporting.

• Revenue Recognition Rule
  • Create Revenue Schedule?: Yes
• Revenue Recognition Treatment
  • Type: Percentage
  • Percentage: 100
  • Revenue Schedule Creation Action: Order Activation
• Revenue Distribution Method
  • Type: Order
  • Distribution Method: Monthly
  • Revenue Schedule Term Start Date: Order Product Start Date
  • Revenue Schedule Term End Date: Order Product End Date
  • Revenue Transaction Creation Process: Automatic
• Revenue Recognition Treatment
  • Type: Percentage
  • Percentage: 100
  • Revenue Schedule Creation Action: Invoice Posting
• Revenue Distribution Method
  • Type: Invoice
  • Distribution Method: Monthly
  • Revenue Schedule Term Start Date: Invoice Line Start Date
  • Revenue Schedule Term End Date: I End Date
  • Revenue Transaction Creation Process: Automatic