(Money Matters) Revenue: All that glitters is gold, right? - Kasfia Rashid

Kasfia Rashid - "Money Matters with Kash the Bookkeeper"

Introduction: 
Hello! Welcome to Money Matters with me, Kash the bookkeeper! Accounting is the language of business. If you own a business or you are thinking of starting a business, you need to know your numbers and how to use them! 

Money matters is all about the fundamental basics of the accounting language, Assets, Liabilities, Owner’s Equity, Revenue and Expenses. These building blocks of business can be arranged and rearranged for a customized experience. Once you understand the basics of any language it is much easier to communicate using that language. 

Together we have discussed the Balance Sheet and all its components, Assets, Liabilities and Owner’s Equity. Need to catch up? Click here for all of the prior shows:  https://feed.pod.co/money-matters-with-kash-the-bookkeeper

The boring stuff is now out of the way and we can move on to the exciting, rock star, concepts everyone wants to talk about. First and foremost: Revenue!

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Show Objectives - The Why

Are you interested in having a PROFITABLE business? If not, you may want to skip this show. Today we are doing a high board dive into the Revenue pool. Most small business owners started their business because of a passion that they have; a passion that can make them money. At the end of the day, that is why it’s a BUSINESS and not a CHARITABLE ORGANIZATION. 

As an accountant and advisor to small businesses one of the top three questions that I get asked is “How much should I charge for my _____________” . Everybody has an opinion on this. From sales gurus to marketing experts; business coaches, friends and family, everyone focuses primarily on the top line revenue of a business. Understandable, since the primary reason that we're in business is to make money. 

What is “Revenue”? Out of all the accounting concepts this is most probably the easiest to explain and understand. Revenue is the total amount of money generated by the sale of a product or a service related to the company’s primary operations. It is the money that people give us in exchange for a solution to their problem. Revenue is not the amount of money that the business owner is left with once the business operations have been completed. That is a different concept called income. Because of this revenue is sometimes called top line revenue, as it sits on the very top of the second financial statement, the profit and loss statement. Conversely, income is on the bottom of the financial statement and is most often referred to as bottom line revenue. 

Key Issues - Owner Perspective:

As an owner of a small business you will be often required to provide evidence of revenue generation. Most of the time it's you as a business owner asking yourself how much money you have made in a given time. This is also the key component to most small business owners budgets, lifestyle decisions, and growth options. Let's face it, if you don't know where your money is coming from how can you gain more? 

Examining your revenue streams is the easiest and most efficient way to scale and grow your business. This is also where most business owners will find new opportunities for growth! Sadly, most books and records are kept for the sole purpose of completing a tax return, which usually  has only one lump number for total “sales”. This limits the business owner from being able to identify their top products/services, their top customers, and their top solutions. By lumping all of the sales into one category, there is no way to tell which products are performing better or worse than the other products and services. Forcing business owners to treat all offerings the same way, even when they do not have the same rate of return. 

How can this be avoided?

What You Need to Know - The What 

“Revenue” or “Gross sales” is basically the sales price of a product or service. It is the amount of cash a customer exchanges for a particular solution to a particular problem.  Sounds simple enough, right? HAHAHAHA! Yeah, right! When starting a business, setting a pricing structure can be a major headache. Small business owners around the world struggle with finding the rates that match the value of their product/service with “what the market will bear”. They are often struck with a paralyzing fear of “being too expensive” and get drawn into price wars with “competitors” in their industry. 

Traditional accounting methods have a simple solution to this.  Add up all of the money it takes for you to make something (the cost of goods ) and sell it for any among above the cost. BOOM! Revenue. 

Can you feel my eye roll through the screen? This is such an archaic tool of pricing; I never recommend it. Yes, the cost of building a product should be included in the final price, but that is not where a small business owner should start when determining their prices. Consider the following questions when thinking about pricing:

1. What are the business’ monthly operational costs? (rent, software, payroll)
2. What is the owner’s monthly living costs? ( car, food, etc)
3. What is the specific solution my product/service provides?
4. Who benefits most from this solution? 
5. Why would they purchase MY solution and not a different solution? 

​What You Need to Do​​ - The How

If generating revenue is the main purpose of having a business, it stands to reason that it would be one of the most detailed parts of your financial data. Yet, that is not the case in the majority of small business owner’s records. A proper accounting system should track each product/ service separately, either on the face of the financial statement, via categories, or through additional schedules that break down the total “sales” category.  This data should then be examined on a monthly basis for any latent growth opportunities. 

The information can be broken down in a multitude of ways and most modern accounting software allows for a blended methodology to be used. When setting up your books and records follow these revenue tracking tips: 

1. Use a product / service list when invoicing customers
2. Calculate a cost of goods range as a starting point for price creation-include TIME
3. Use payment method or revenue streams as categories on your chart of accounts
4. If selling both products and services, create separate categories for each with sub-categories as needed

Once this information is set up and easy to find, you can use it to find your most and least profitable customers and goods! If you want to know more about how to leverage this part of your financial statements check out my shows from this summer! 

https://pod.co/a-financial-results/episode-a3a-006-what-are-your-most-and-least-profitable-products-and-services

https://pod.co/a-financial-results/episode-a3a-007-who-are-your-most-and-least-profitable-customers 
 
Additional Resources 

1. Check out Kash’s Youtube Playlist: Bookkeeping basics for small business owners. 
2. Source Articles https://www.accountingcoach.com/blog/what-are-revenues
3. https://www.investopedia.com/ask/answers/122214/what-difference-between-revenue-and-income.asp#:~:text=Revenue%20is%20the%20total%20amount,company's%20total%20earnings%20or%20profit.
4. Want more KASH? Sign up for the free newsletter! 

Shows: 
Previous: The Accounting balancing act, aka The Balance Sheet!

Next: Expenses: The real cost of business.

​Written by Kash the bookkeeper  
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You can connect with Kash on any of her seriously social platforms under the handle @Kashthebookkeeper
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