What’s the right way to recognize revenue?

August 15, 2023

The CI business model is incredibly cash rich, but managing that revenue and producing reliable metrics can be difficult in a project-based CI firm. 

 

In response, our industry has developed many different ways to recognize revenue (recording and reporting revenue earned by a company) across the industry: 

  • Cash received/requested | Some dealers recognize this cash as a revenue transaction, but you end up recognizing revenue well in advance of any cost.

 

  • Job completion | The dealer bills upon completion, but this limits recognizing revenue to after costs are incurred and makes it hard to see the health of the company.

 

  • Goods received | As equipment arrives, dealers expense and invoice the held customer deposit, and sets it aside for the customer.

 

  • Percent completed | The dealer retains the customer deposit and bills out (recognizes revenue) as a percentage of the equipment and labor at milestones through the project. The problem here: how do you invoice half of a TV?

 

  • Production-based | The dealer holds onto the deposit and recognizes revenue as the equipment is delivered and labor is performed, usually on a weekly or monthly basis. 

 

In our years of guiding CI businesses to success, we’ve seen all of these revenue recognition models in play. And time and time again, one model proves the most effective:

 

Production-based. 

 

Why? It’s simple. If you want to gain a deep level of visibility into the timely and accurate metrics of your business, use the production-based revenue recognition model. 

 

It gives deep visibility into your business because it best aligns cost with revenue, meaning you get the most accurate picture of your:

  • Business’s current status
  • Work-in-progress (both complete and to-do)
  • Financial backlog
  • Gross Margins (The #1 Metric to Manage)
  • Future months’ forecasts

 

If you want to go deeper, join us for the members’ only Ask the Expert on August 22, 2023! Not a member? It’s easy to get started. Book a FREE 15-minute call with an Expert VITAL Guide: https://growwithvital.com/freecall/

 

Stay VITAL,

Matt & the team

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In our view, business excellence involves systematic approaches, accountability, and keeping a close eye on the numbers. Wondering how to weave these practices into your business? We’ve got you covered.

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Matt & the team

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