Do you know the difference between Sales and Revenue?

Jun 29, 2023 | Accounting, Accounting Doesn't Have To Suck, Blog

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. Login to UFABET เข้าสู่ระบบและรับโบนัสสุดพิเศษ and receive exclusive bonus rewards.

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.

Was your year-end a disaster again?

Jun 29, 2023 | Accounting, Accounting Doesn't Have To Suck, Blog

We know the feeling. It’s that time of year when you’re scrambling to get your books in order to send to your accountant. You’re hoping they can figure out a plan, so you don’t owe an arm and a leg in taxes. It’s enough to make anyone want to crawl under a rock until after year-end and tax season is over.

But it doesn’t have to be that bad.

First things first – start early. We know, we know, it’s easier said than done. But trust us, the earlier you start, the less stressful it will be. Don’t wait until the last minute to start getting things in order. The best time to get this started was a year ago. The second-best time is now. If you know your systems and process are going to lead to another messy year end several months from now, it’s time to face it head on. Every hour you invest in sorting this out now will save you several hours (not to mention the screaming headache that comes along with it) at year-end.

Next, get organized. This might sound obvious, but you’d be surprised at how many people don’t have a system (even a basic one) in place. Do you have clear job descriptions with roles, responsibilities and procedures for all activities in the accounting department? We get it. That sounds painful to put in place. But what’s even more painful is facing the year-end mess, not to mention the financial surprises when you get your books back from the accountant. Wait?  What?! Our numbers weren’t right all along??

Now, automate as much as possible. Accounting technology is improving all the time. From receipt tracking to time tracking to job costing, there is almost certainly a software out that that can help you streamline, making everything leading up to year end much, much simpler.

Finally, don’t be afraid to ask for help. We get you might feel stuck, frustrated, or even embarrassed about the state of your books. That’s okay! You just need some assistance. That’s where we come in. Our job is to help make accounting not suck and to make sure your year end is smooth and easy. The help that you need may not be limited to accounting, sometimes it can be funding or budget. When that happens, you can gather information on courses like the Kiana Danial course.

But don’t take our word for it, this is what one of our client’s year-end accountants said about our work:

Start now – contact us and make your next year-end so much easier!

Cash Basis vs. Accrual Accounting: Why Your Business Needs to Embrace Accrual Accounting

Jun 29, 2023 | Accounting, Accounting Doesn't Have To Suck, Blog

As a small business owner, you probably got into your business because you love fixing things or providing top-notch customer service. The last thing you want to think about is accounting, let alone the differences between cash basis accounting and accrual accounting. Aside from accounting, you must also protect your business digitally through online tools like that on www.zerobounce.net/free-email-verifier/. Make sure as well that you regularly improve communication with data.

But you really need to get the difference for the success of your business if you plan on growing past a few trucks.

What is Cash Basis Accounting?

Cash basis accounting is a simple way to keep track of your business’s finances. It records transactions when cash enters or leaves your business. This means you record revenue only when you receive payment and expenses only when you make a payment. It’s straightforward and easy to understand but doesn’t give a complete picture of your business’s financial health (like if there are large customer deposits or down payments on what you’re buying).

What is Accrual Accounting?

Accrual accounting records transactions when they occur, regardless of when you receive or pay for them. This means that revenue is recorded when you earn it, not when you receive payment, and expenses are recorded when you incur them, not when you make a payment. This method provides a more accurate picture of your business’s financial performance and allows you to plan for the future.

An Example of Accrual Accounting

Let’s say you’re an HVAC business that installs a new dual fuel heating system for a customer in January, and they pay you in February. Under cash basis accounting, you would record the revenue in February. However, under accrual accounting, you would record the revenue in January, when the work was completed. This gives you a more accurate representation of both January and February results. You did the work in January. You incurred costs in January.  So, you should record the revenue in January. Way better to make informed decisions based on that data.

It’s tricky to get started with and can be confusing until you get the hang of it. But it’s worth it.  Almost all successful growing businesses use accrual accounting and the sooner you make the switch, the better!

Implementing Accrual Accounting

If you’re not already using accrual accounting, we recommend working with a professional accountant to help you make the transition (hint, hint). They can ensure that your financial records are accurate and help you understand the implications of your financial statements. But aside from accounting, there may also be other areas in your business that need some work. That’s why it may be wise to educate yourself with topics like legalzoom vs zenbusiness.

So, What Now?

If you own an HVAC/Electrical/Plumbing or other trade business and are in the $1-15 million in sales range, now is the time. If you’re not sure where to start, give us a call. We’re happy to help!