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How safe is your subscription / membership cash?

Article by Gill Lambert

5th April 2018

Accounting, Finance, Subscription management

How safe is your subscription / membership cash?

Is your subscription or membership cash adequately accounted for within your organisation?

Whether you are a marketer or a business owner, if your business is based on recurring revenues then you will be extremely focused on your subscription/membership revenue, your yield per member and the revenue released for any given period. But how much attention do you pay to the cash collection and accounting process within your business?

Whether you manage your customers via a CRM system or via an external bureau, the application will produce revenue reports that assume all payments recorded as paid, have actually been paid in full, and that any subsequent adjustments have been fed back into the system.

So for you to have absolute confidence in your financial reporting, you need to know that the business has received all of the cash that is represented within those revenue figures.

In pretty much every organisation out there, managing cash is the responsibility of the finance team, and a good credit control system ensures that key revenues are collected.

Unfortunately, finance people tend not to understand the detail around managing subscription funds, and because these funds are typically made up of a large number of small payments, decisions are often made that allow small errors or discrepancies to go unchecked.

The only way to protect your business from this risk is to reconcile all payments on a regular basis.

Zero tolerance

The process of reconciling relatively low-value items can appear arduous and many large organisations have percentage tolerances that they work within in order to account for differences in transaction timings etc. On this basis it is not uncommon for a finance director to work on an assumption that the cash transactions are correct and complete if the cash collected for a given period matches the value of the revenue release for the same period to within a % tolerance.

Given that only a fraction of that cash will relate to the revenue release for that period, this assumption introduces a much higher risk of financial error than you would expect, unless you have a detailed understanding of the workings of the subscription revenue model.

The risk comes from the fact that an error will only show up on a revenue or marketing report when enough small errors have accumulated to create a trend, or a variation from the trend that you were expecting to see. By this time the impact will be material and will hit your bottom line.

3 examples of common cash collection errors

So what can cause cash discrepancies? Here are three types of errors that can result in small cash discrepancies that unchecked, can persist to create a significant revenue gap.

  • Affiliate revenues not received. Customer data will have been added with a status of paid
  • Changes to bank accounts, credit card merchants or new payment gateway integrations
  • Payment processing errors where, for a multitude of reasons, payment failure notifications do not reach the subscription system. These errors can be small in volume but will accumulate over time, and any customers affected will flagged as paid instead of suspended or cancelled.

In all of these examples, the cause can be difficult to check in an automated way, mainly becasue they involve checking for something that hasn’t happened, but if they are spotted quickly, the errors can be easily rectified and have zeror or minimal financial impact. It is time that causes complexity, and time that allows each cash short-fall to accumulate into material losses often amounting to thousands, if not tens of thousands of pounds. Plus you may also incur real costs in fulfilling products that have not been paid for.

Aside from the direct financial impact on the business, long-running errors will have affected your marketing reports, over-stating performance and potentially driving you to make the wrong decision when allocating future marketing spend.

If you do outsource your subscription/membership management then you may well consider cash management to be the responsibility of your supplier, but if they don’t have access to your bank account then they will not be reconciling your funds, so that absolute acid test of financial control should be happening with your business.

I would also argue that you cannot delegate away all responsibilities, plus the accurate tracking of cash acts as a really effective audit for the whole transaction management process and is great way to monitor the performance and accuracy of whichever application you use.

So if you are still thinking “this couldn’t happen in my business”, then that’s great. But are you sure?