Learning About Revenues and How You Achieve Them

Revenue is possibly the biggest item that a company has in their financial statements. You may assume that you already know what revenue and how you obtain it, however, no one has yet come up with a straightforward definition that can be applied to revenue under all circumstances. If you read revenue reports appropriately, you can help to improve your understanding of a company’s financial condition. In addition, it can also allow you to make a more effective and efficient assessment of a company’s fundamental core strengths and weaknesses. The essential equation in business financial reporting is: revenue minus expenses equals profit (Revenue – Expenses = Profit.) The basic underlying issues for investors are revenue quantity and revenue quality. Achieving these two aspects (quantity and quality) is what will help you to gain more investors. From a quantity perspective, the most desirable level of revenue that can be achieved will depend on the company’s business model. Most typically, mature firms have revenue streams that range from stable to gently expanding. On the other hand, high-growth companies’ revenue patterns may fluctuate to reflect their profit aspirations, or where they want to be. Selecting the most appropriate technique for measuring revenue growth can be a tricky task all in itself and all of it requires a bit of effort. Some industries’ revenue patterns follow predicable annual cycles. Others are more sensitive to the larger movements of the economy. Therefore, you might compare a company’s first quarter one year to the first quarter in the previous year. Or you might want to compare another company’s second quarter to its first quarter performance. It is important to keep track of all this data just so that you can analyze it for this very purpose. It can be confusing at first, but it will pay off over time to have this knowledge of your company. Effective revenue analysis may even require a deeper level of detail. For example, a retail chain that is consistently opening new stores may not be analyzed based on its total revenue, but rather on the basis of the chain’s average revenue of stores open for at least a year. At the individual level, cash flow and revenue are pretty much the same thing, but for a company’s financial report, cash flow and revenue are not, and they may not even be similar. That is because a business may receive payment well before or well after a product is delivered. It is because of this that, while a company may record an entire payment as cash flow the moment it is received, the company must report the cash as revenue over the entire course of its relationship or contract. Also, the company must include the fair market value of goods and services it receives in trade as revenue. Each of those actions requires a judgment call from the company’s accountants. First, there must be persuasive evidence that a commercial arrangement exists, such as a written contract or purchase order. Secondly, a delivery must have occurred or services must have been rendered. Third, the selling price is fixed or determinable by an objective formula. Finally, collect-ability of the obligation is reasonably assured. While there are still few hard-and-fast definitions for those concepts, companies with publicly-traded shares must outline the principles they follow for revenue recognition in their financial reports that are filed. Investors who wish to assess the quality and strength of a company’s revenue judgments should read those disclosures carefully preferably with a financial advisor, as part of their due diligence process; it will help them determine the value they see in a particular company.

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