The Ledger

A digital finance blog

The Ledger

Posted by Sarah Werner

Creating a complete picture of revenue health

Revenue is one of the most important KPIs for an organization. A revenue multiple may be used to value a company for an interested buyer, strategic partner, or investor. Strong annual revenue growth underpins company value, drives investments and new business generation, and may entice key new talent to join. Failure to accurately account for revenue could also result in serious issues that can damage a company’s brand. 

There are several factors that contribute to the ‘health’ of a company's revenue and taken together they can peer beyond a single figure and paint a more complete picture of the organization. Here are five ways to assess revenue health in your organization and pinpoint areas of opportunity and improvement. 

Five important revenue KPIs you may be overlooking

Revenue diversity 

Revenue diversity may seem straightforward since most business leaders understand the danger of having too much revenue tied up in a single client or sector. But more subtle issues may arise if reporting across products and divisions lacks consistency or is not granular enough, hiding potential imbalances. Having too many offline tools and processes might delay report generation and cause the business to miss a window for action or change. 

By centralizing granular data in a platform owned and managed by finance, analyzing contract and revenue data can reveal excessive or subtle dependence on a single revenue source, business model, industry sector, region, or demographic. This can spur an adjustment towards sustainable profitability, development of new products, or entry into new territories. 

Revenue cost 

Analyzing the full costs associated with each sale or contract can reveal true product profitability and uncover region or team best practices, effectiveness of incentives like commission or discount, and the amount of funding tied to a particular revenue quality.  

Having an automated revenue solution can add value across the many aspects of a contract lifecycle, including deal structuring. At AptConnect 2020, Jen Anderson, then Americas Controller for Red Hat, talks about how RevStream allows them to be involved in this aspect of the sales process.

Deal structuring is incredibly important to Red Hat. It is important that our revenue teams are closely engaged with our sales team so that we can understand the impact of the deals that they are putting together and help them to put more beneficial structures in place. With RevStream we are also able to understand new offerings and how they impact revenue recognition under ASC 606.” 

Revenue pace 

Measuring your revenue pace reflects the speed at which your sales will translate to your income statement or P&L. The determination of what is a ‘good’ versus ‘bad’ revenue pace is determined by the organization’s revenue goal – whether that is achieving maximum revenue per day or customer stickiness with long duration revenue commitments. 

Analyzing the pace at which specific revenue streams are recognized from sales order or contract signature to proof of delivery, to P&L can help identify and rectify revenue log jams like credit score, fulfilment, or product delivery/service issues.  

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Revenue loading 

Revenue loading is the ability to evaluate the financial impact of concessions made based on deal timing. This means analyzing how fast revenue flows to the books during the period (month or quarter) and how much is sensitive to actions taken during the last few days or hours of the month.  

For example, an organization may find that higher than normal levels of discounting regularly occur to get the deal closed, reducing the profitability of a contract. Or a key event, like training, may need to be delivered before this ‘pent up revenue’ can be reported. Analyzing revenue loading can help determine the level of back-end risk to the period and which type of products or contracts worsen such risk. With this information, you can reduce risk and increase certainty of profit. 

The automated calculation of Standalone Selling Price (SSP) can help an organization monitor, track, and govern sales behavior, especially discounting and pricing. SSP calculations are needed for compliance purposes but can be incredibly onerous if calculated manually using excel, slowing down the closing of the books and creating an inflexibility to new products. Automation these calculations can unlock valuable insights across the revenue contract lifecycle and help finance partner with sales and marketing teams to ensure accurate pricing and discounting. 

Revenue conversion 

Knowing how long revenue from contracts is sitting on the balance sheet before moving to the P&L, can alert an organization to act and optimize balance sheet use and efficiency. For example, it may be that you can tweak your business model to run on less working capital and divert the savings in that area to product development and driving innovation for competitive advantage. 

Ideally, organizations want to produce forecasted results based on existing bookings (deferral release) and predicted bookings. And they want to do this quickly and transparently to provide the business with a view of future revenue to allow for planning and communication with external analysts and stakeholders. Capabilities like waterfall reports for shorter term forecasting and pent-up reports to aid in the monitoring of what might be released in the short or longer term, can help. 

 

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