Understanding The Difference Is Key To Understanding Your Growth.
Did you know that “Sales” and “Revenue” are two different concepts? You should know this important distinction when reading your Income Statement. “Sales” represents the products / services that were sold, at the time that they were sold. “Revenue” represents when you actually fulfill the stipulations of the sale.
These can sometimes occur at different times. For example, let’s say that we produce an online software program. When we sell an annual subscription, we immediately book that as a “sale.” But it has not converted into revenue at that point, because we still need to fulfill the stipulations of that sale – mainly, the customer needs to have access to the software for the next 12 months (and we need to make sure that the software provides the features promised). Every month thereafter, a portion of our “sales” converts into “revenue.”
Because Sales are booked immediately and in full, your sales figures will most likely be choppy – up one month and down the next month. If your income statement showed just sales, you would be hard-pressed to truly understand the profitability and growth patterns of your business. Revenues, on the other hand, tend to smooth out these sales, and give you a true picture of how much money you are making on a monthly basis. This is much better for analysis purposes. You still need to pay attention to sales, however, because sales today will convert into revenue tomorrow.
Sound complicated? It is! Accountants go through many years of schooling (and continuing education) to learn how to properly account for your financial transactions and analyze a financial statement. As masters of accounting, we ensure that your financial statements accurately represent the information you need to know in order to properly analyze and grow your business. If you are confused by these two definitions, YOU NEED TO GAIN CLARITY ASAP! Schedule your free consultation below and let’s chat.