Right now you are probably tracking revenue by cash. You get payment from a client, you have some sort of payment processor process it and two days later it’s in your bank account, then your accounting software takes it and marks it as revenue.
What I would like you to do is take a step back and look at revenue in 3 different ways: Gross Revenue, Accrual, and Cash.
Gross
Say you have a business and you book a sale. That total sale is worth $1,000 total, but is broken up between 4 monthly payments of $250. Your gross revenue is still qualifying that sale as $1,000, even though you haven’t received that entire $1,000 at once.
Accrual
This is when you count that revenue when you actually render the sale. So let’s take the above example and use it here: You get $250 monthly for 4 months. You would only count your revenue as $250 (each time you receive it), as opposed to the full $1,000 (like you would with Gross Revenue).
Cash
With cash, it is very similar to accrual but the revenue only counts once you render the actual money from the sale. So if you make a sale at the end of March, but the payment is not made until the end of April, you would calculate your revenue as being in April.
So what I want you to do is think about your revenue in those three aspects. They all have their place at times, so understanding when to think about them is important. Gross sales are extremely important for when you initially make the sale; all of your marketing efforts, your sales efforts, you want to see the complete breakdown of it all when you make that sale. From an accrual basis, you want to see when those costs will be incurred over the course of when you will be getting the 4 – $250 payments. From a cash perspective, obviously when you receive the cash is very important in the overall scheme of the sale.
To run a business, you really need to think about revenue in those 3 aspects. While it can be overwhelming to think about, it is so important to the running of your business. If you need help with any of it, reach out to a qualified tax professional like CPA On Fire so you can get started growing your business.