Sales, turnover, income, whatever you decide to call it. Revenue is the money coming in to a business.
For most business owners it forms the lifeblood of the company, it is what everything else is pointed toward. However one of the biggest accounting mistakes businesses make is thinking revenue is revenue when it isn’t.
Let’s start with the definition of ‘revenue’ which is taken from Business Dictionary.
The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organisation before any costs or expenses are deducted. Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income. Also called sales, or (in the UK) turnover
Sounds simple enough. However there is one thing missing that so many small businesses fail to account for.
Revenue can only be counted as revenue once the goods or service have been delivered.
Let me explain a little further…
The Revenue Mistake
Say you are delivering an IT project that involves installation of networks over a 6 month period. The very nature of the project means it needs to be done over a period of time. The client pays you £2500 upfront and another £2500 on completion.
On day one you invoice for your £2500 and get paid a few days later. This is not revenue and should not be counted as such. This £2500 needs to be gradually introduced as revenue over the 6 month period, as each part of the service is being delivered. The final tranche can go straight into revenue as the service will have completed by the time it is invoiced.
The biggest impact of mis-applying revenue comes with businesses who take deposits or payment in advance. They always have good cashflow and if revenue is wrongly applied then some good looking P&Ls. However they are falling foul of getting it wrong.
If you think it is just small businesses that do this then don’t, you could apply a similar scenario to many failed travel agents, carpet retailers, maintenance providers etc, the list goes on…
The HMRC Black Hole
There is another very good reason to get revenue properly applied. At the end of the financial year your corporation tax is based on profits. Add your revenue in too early and you could end up with a tax bill and no cash.
I am not suggesting you do anything dodgy with HMRC (wooahh no…) but I am suggesting you understand how revenue works and properly apply it.
Don’t fall foul of thinking revenue is revenue when it isn’t.
By Dave Farmer
If you want to know more about how Lime Consultancy can help your business grow it’s profits, or have any comments about this article then please add them above, or contact Lime Consultancy direct via their website.