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How to Easily Manage Software License Renewals

October 7, 2015
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How you can have Centage manage this task with ease and accuracy

All organizations rely on software products in their daily operations across all departments and business segments. Enterprise software ranges from ERP, accounting, and finance applications to engineering, CAD, CAM, marketing and sales automation, and also includes the software I am using to write this blog article. Most software vendors structure their revenue streams to charge for an initial perpetual license fee based on the number of users, number of sites, options licensed, and some use the gross revenue of the business as a basis for the licensing fee. Then, on an annual basis, they charge their customers an annual maintenance fee, usually in the range of 10% to 20% of the original perpetual license cost. Software licensing sold using the SaaS (Software as a Service) model requires a subscription, usually billed annually in advance of the service period.

Treating Perpetual License Fees as Fixed Assets

The perpetual license fees should be treated as a fixed asset with a certain life, usually 36 months, which can be run through the dedicated Fixed Assets software. What about annual renewal fees and subscription model expenses? Here, again, one can use Centage to set up a special plan to track these expenses, amortize them over a 12-month period, and most importantly, know exactly how much to charge the software licensing annual fee GL account in each period while updating the prepaid license fees account.

Setting Up a Simple Plan

I just set up a simple plan to test this idea and I'm happy to say that it works great. Here's how I did it:

  1. I created a new plan and set the calendar to match my fiscal year calendar. I set the number of years to the maximum allowed. With the advanced version of Centage, you can have up to 30 years, but even the standard version gives you enough years so you won't have to set up another plan for quite some time.
  2. I set up a handful of GL accounts useful (but not required) in Centage and linked them to account groups to help with proper reporting. The most important account here is the "Annual Software License Renewal" expense account which I linked to a Depreciation Account Group. Then, I created an Asset Group (the only one needed in this plan).
  3. I set up a Depreciation Method I named Software License Renewals, gave it a one-year (12 months) life with a Straight Line amortization, and linked it to the "Annual Software License Renewal" expense account. This means that all new entries will be amortized over the next 12 months and each period will show a reduction of 1/12 of the prepaid annual amount for each asset.

Entering New Assets

Now, as software vendors submit invoices for the following year's renewals, I enter new "Assets" in the Centage Capital Assets Module. I have my default set up to automatically assign these "Assets" to the only Asset Group I have in this plan, as well as the only Depreciation Method. All I have to do is enter a Name, a meaningful description, the cost (from the vendor's invoice), and the "In Service" date which will determine in which periods this new pre-paid expense will be amortized. Users of Planning Maestro will immediately recognize these simple steps I am describing here.

Managing Multiple Software Licenses

This becomes very useful when there are many software licenses that have recurring annual renewals, all at different dates during the year and at different (and varying from year to year) amounts. Centage then perfectly allocates the prepaid amounts to the proper periods for every item in the plan. With a simple report, I can see exactly the amount I must charge to the Annual Software License Renewal account while reducing the pre-paid asset account and maintaining a correct account balance every period.

Flexibility in Planning and Budgeting

While this is the way I decided to do this, I don't see a reason why you couldn't incorporate this function into your regular Plan and Budget. However, with a standalone system, you do not have to reload the software renewal fee items each time a new annual budget is created. Other long-lived, intangible assets (e.g., Patents) can be tracked in a similar fashion and provide the data needed in order to make the required entries into the actual company GL.

Using Centage for Fixed Assets

All of these activities can be performed in a standalone, dedicated fixed assets software solution. However, to me, having already licensed Centage, I can get all the information I need from the Centage reports and achieve accuracy and completeness in all the accounting transactions derived from these software license renewal fees activities, as well as all other tangible and intangible assets.

Of course, this text is not meant to provide any accounting, tax, or other professional advice, only observation for another great use of Centage, using the already licensed product and the number of users already authorized to use the software.

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