At Dunker Muffin Paper Company (see what I did there?), everyone is up in arms about the most recent first quarter accounting reports that were just released. The sales team is convinced that the accounting department has incompetent employees and the accounting team is playing defense, adamant that their processes and ways of record-keeping are correct.
And it all started around the water cooler.
Steve from sales: “Hey, did you hear that Monica and I landed an incredible contract with School Smarts, LLC for $48,000? Just this one deal put us over our sales goal by 5%! I can’t wait to celebrate.”
Anita from marketing: “I did hear about the new contract, but the Q1 accounting report was just released and it only shows $6,000 in revenue for this quarter. I thought maybe the sale never actually went through.”
Steve: “WHAT? I was the one who personally saw that the contract was signed. It’s a done deal! I’m going to run this up the chain. That’s ridiculous!”
Anita: “I would. You definitely don’t want to get overlooked when it is bonus time!”
The banter and slighted feelings continued growing bigger and bigger until Dunker Muffin Paper Company had a full blown morale problem that had people and teams pitted against one another. As it turns out, the contract was for $48,000 of product to be provided over 2 years. The difference in numbers came down to when and how the numbers were being recorded.
This unfortunate situation can be avoided in your business if everyone in your company is on the same page when it comes to understanding sales versus revenue and how they are recorded. What’s the difference between revenue and sales anyway? Are they the same thing, or not? I’ve found that sales teams and accounting records don’t always agree about what has been “sold.”
I’m available to step in and serve as the mediator in your company, helping you set standards and guidelines to help your business stay financially healthy…and avoid misunderstandings that can cause conflict. I see both sides of the financial coin, bringing understanding and continuity to your financial records. Contact me today and let’s chat about your specific situation and how I can help.
Defining Sales vs. Revenue
Are you among the group that has always thought sales and revenue were essentially the same thing? If so, you aren’t alone. Most people do, and technically… they are right. Honestly, a lot of businesses don’t see a problem with grouping them together if they are practicing cash basis accounting. (You can learn more on the blog about cash vs accrual basis accounting and why cash basis might be sending your business towards a financial collision.)
But if you have recently switched to accrual basis accounting, you’re probably seeing this problem creep in for the first time. As we saw with Dunker Muffin, the difference is in how they are recorded between teams. The good news is that by creating a slight difference in the definition of each, it will help your teams work together more effectively, as long as the definitions are communicated and understood across the company.
A more useful sales definition is this: the total amount of a signed contract from a customer who is committing to purchase your goods or services.
A more useful revenue definition is this: The amount of goods or services provided to a customer in the current period, regardless of when they pay or the total contract commitment. This is the amount which shows up on your income statement or your profit & loss statement on an accrual basis.
Every business has their own set of “GAAP House Rules” – or how they implement Generally Accepted Accounting Principles. One accounting concept that I highly recommend all of my clients use is proper revenue recognition, as directed by accrual basis accounting.
Revenue Recognition dictates when to record revenue. Businesses should record revenue when it has been earned – when your products have been delivered or services have been rendered – regardless of when cash is received.
As I stated in my GAAP House Rules blog article, the best way to think of this concept is with a sweet tooth: You can’t have your dessert (revenue) until you’ve eaten your dinner (delivering the product).
Revenue Recognition in Action
Let’s think about revenue recognition in another way:
Even though 2022 was a great sales year overall, Dunker Muffin Paper Company had no new sales between February and March in 2022. Business was down because of a slump in the economy – Yikes. If Dunker Muffin only looked at sales from month-to-month, they would have seen $0 for 2 months, which is more than a little terrifying for a business owner! However, the accounting reports were showing $5,000 in revenue each of those months. No sales were made, but revenue was showing up on the income statement. That’s because they were recognizing revenue when it was earned, not when the sales team signed the contract with the customer in January, 2022.
Recognizing revenue when it is earned gives a more realistic view of your business’s financial health. At the end of the contract term, the total sales and total revenue are equal and everyone is back on the same page.
A Financial Mediator Brings Your Teams Together
I would love to serve as a financial mediator for your business, taking the big picture snapshot of your business and assisting you to set guidelines and principles that allow everyone in your company to see eye-to-eye, month-to-month, and quarter-to-quarter. Contact me today to set up a consultation.