Your revenue is by far the most important number in your business.
What about profit, you say? That’s also important – the best way to improve your profit sustainably, in the long term, is to understand your revenue. What’s it made up of? What drives it? Why does it go up and down?
Up until the mid 80’s, supermarkets rang up your sale in their cash registers. The only way they knew what they’d sold was when they did their re-orders and their stocktakes. Scanning each item and collecting the number of units of any given product sold revolutionised their supply chains and their profit models, simply by accurately measuring the number of units of each item they sold, at what price.
Fast forward to the current day, with the advent of e-commerce as the principle method to sell and supply products to consumers for many business owners.
Does that mean you have a revenue code in your financial system for every product? No it doesn’t. Your profit & loss statement would become unwieldy and impossible to read. The product level reporting in your shopping cart should do that for you.
Why can’t you just use your shopping cart reports? If they match exactly, yes you can. However often there are differences such as refunds, chargebacks on credit cards and other one off items that make them different. Your revenue is reflective of the cash you have received from customers, thus is the only “real” number in your business, otherwise you may have leakage in your business processes you’re not aware of which are costing you money.
The best practice is to setup summary revenue codes in your accounting system and then apply the relevant summary code to each product in your inventory system. How do you figure out what summary codes to use?
By way of example, let’s look at a specialist supplier of artisan flip-flops. You may have a range of children’s, women’s and men’s flip-flops in your product range. In your shopping cart, each item will have product code. Let’s say you have 20 different products, 8 for children, 8 for women and 4 for men. They also come in a variety of sizes.
While the cost of making each product may be similar, how you market to each group will differ. There also could be differences in shipping related to volume, where some are bought in bulk and others (such as children’s shoes, which they grow out of) are purchased one at a time.
In this case, you’d have the following account codes in your accounting system (codes starting with 1 are revenue, codes starting with 3 are tax related):
- 123 Women’s shoes
- 134 Men’s shoes
- 156 Children’s Shoes
- 180 Gift cards
- 350 Sales Tax / GST / VAT
- Look at revenue month to month by category to see what’s growing and what’s shrinking
- Divide the total revenue by category by the number of flip-flops shipped to track average revenue / product
- Divide the total revenue by number of shipments of that product to track average revenue / customer
Why do gift cards have their own category? That’s because when you sell them, you’re not entirely sure what product they will purchase.
How about refunds? There are two ways to do this, you need to pick one of them depending on what gives you better information:
- Have a separate code for refunds so your product revenue is purely related to products shipped and you can track your level of refunds separately
- Allocate refunds against the original revenue category so, over time, you get an accurate picture of the real revenue by category, average pricing etc.
You need both, the trick is to pick the system method that’s most useful to you, most of the time, the analysis to do the other calculation then needs to be done using data downloads and spreadsheets.
The other code that’s essential to get right is the tax code to ensure you correctly measure revenue. That’s not your money, it is funds you’re collecting on behalf of either local, state or federal govts. Getting this split right will mean the revenue numbers on your profit & loss statement are accurate and hence useful in how you grow your business.