Sales and Revenue are terms that often get mixed up, but they have very distinct meanings.
Understanding the difference between them is key to understanding financial health.
An easy way to think about it is breaking it down into three steps: Sale, Revenue, and Payment.
The Sale – Think of this as the high five for “closing a sale”. This is essentially an agreement to purchase goods/services. But the transaction may not complete when the deal is done – like if you sell a car but it won’t be delivered until next month. Or, if you sell a marketing campaign that will happen over the next six months.
Revenue – This is when the value of the goods or service is delivered to the customer. That car you “sold” in June finally got delivered in September? The revenue (i.e., what’s recorded in your books) is recorded in September when the customer receives the value of what they purchased.
It’s pretty simple when delivering a single item like a car. It gets more confusing if you have a multi-month service contract like a marketing campaign. In this case, there are a few ways to calculate revenue (sooo many confusing accounting rules), but the easiest way to think of it is how much of the service have you delivered at the end of the month? If I have a $1,000,000 marketing campaign and we’re 15% of the way in after month one, revenue would be $150,000.
That way, your revenue reflects the work you’ve been doing month to month, rather than a one-time monster hit of $1,000,000 when the “sale” is made, or the money hits the account.
Tracking Revenue allows you to track the work you are performing over time and how much you really “earned”.
Payment – This is completely independent of sales and revenue. If you take deposits, get paid on delivery, or offer payment terms, when you receive the cash does NOT affect sales or revenue. That’s what Accounts Receivable is for (which we’ll save to be the subject of another article).
Some examples:
1) Basic transaction – In its simplest form, imagine someone walking into a store and buying a pack of gum. The sale, revenue and payment all happen at the same time. Simple and complete. Sales = Revenue for the month.
2) Basic transaction with delivery date – Imagine the gum example above is a $50,000 car which was sold in June and delivered in September and had a $5,000 deposit with the rest due on delivery.
The sale was done in June (when the contract was signed).
The revenue is recorded (i.e., hits the books) for $50,000 in September when the car was delivered (i.e., the value was transferred to the customer). This is when the sale is entered for accounting purposes.
Payment was a deposit of $5,000 in June with the remaining payment completed in September. These payment terms don’t affect sales or revenue.
3) Contracted service over several months – Imagine selling a marking campaign for $1,000,000 in June for a project that starts in August and runs to the end of the year.
The sale was done in June. High five. You just landed a big contract.
The revenue is recorded as value is delivered to the customer – even if the work isn’t complete, but it is part of the overall contract. Maybe there is some setup work. Perhaps some A/B testing is required. Even though the marketing campaign isn’t in full swing yet, the value of doing the early groundwork has been completed, so you get to record the share of the work that has been completed.
The revenue might look something like this (depending on the work schedule):
August revenue – $140k
Sept revenue – $240k
Oct revenue – $180k
Nov revenue – $320k
Dec revenue – $120k
The payment will reflect when the cash comes in. Was there a deposit in June when the deal was closed? Were your payment terms 1/3 on start 1/3 at the halfway mark and 1/3 on completion? Whatever the payment terms and actual collection date, it doesn’t affect revenue.
Why do all this?
We get it. It’s a bit confusing. Why bother with all this noise? When done right, it actually really helps get a handle on the numbers. No more having a huge sales month, then a dry spell when the work is actually happening. The idea is to “match” the revenue to the right months. It takes a bit of getting used to it, but once you get it, you’ll never want to go back to the idea of “sales” the way you think of it now.
If all this financial talk makes your head spin, don’t stress—we’re here to save the day! As a progressive CPA firm, we specialize in making accounting not suck by making understanding your numbers quick, simple and intuitive.
So, the next time someone asks you about the difference between Sales and Revenue, you’ll impress them with your newfound accounting expertise. And remember, if you need any help making accounting not suck, give us a shout! We’ll be your financial superheroes, swooping in to rescue you from the clutches of confusing, financial jargon.