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Business case help - recognising revenue paid over 24 months

Candi Bell's Profile

hi im stuck on a business case I’m doing at work (retail business). So it’s selling a product that costs us £100 and customers will pay £10 a month for over 24 months - I’ve got to business case the numbers for first 6 months, then a full year after.

So, volumes are expected to be 1000 sales a month. I’m planning to show numbers as:

Year 1 (6 months): 6000 (1000 volume x 6 months) x £240 (recognising all the revenue £10 x 24 months up front)
Less costs £100 x 6000 volume
Less bad debt assumption of 10% on the revenue
Less staff commission of 10% on the revenue

Year 2 same again but on volumes of 12000 sales

Anything I’m missing here? Am I ok recognising the revenue all up front??

Thanks

Candi

Answers

Victor Shah
Title: Account Manager
Company: FlowRocket, LLC
(Account Manager, FlowRocket, LLC) |

Candi,

Recognizing Revenue does not completely depend on when you receive money? What is the nature of revenue and what are the terms? Is it a product sale and only payment is divided in 24 months or are you selling as a subscription based?

If you are selling on subscription based, you can not recognize revenue for 24 months upfront.

And if it is only about the payment terms from customer, you may think of recognizing it upfront. Now, if you are recognizing it upfront, at Year 2, how can there be a revenue calculation on 12,000 units? You have already recognized full revenue on the 6,000 you sold in Year 1, so that doesnt come into picture again. Year 2 will also be the 6,000 units you sell in year 2.

I hope this makes sense. Though, my answer and treatment would vary in different situations depending on your sales terms.

Let me know if you need more help. You can contact me on victoratflowrocket [dot] com for a detailed understanding on how you can take it to your books.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Candi
The business case may have 2 components to it:
1. P/L dimension, which will be driven by factors like rev rec
2. Cash Flow dimension, which will be driven by factors like timing of cash inflows (from customers) and outflows (to vendors).
Example: look at your financing requirements if you have to pay your vendor $100 on 30 days terms, yet it takes 10 months to collect $100 from the customer. Then project this example for the number of units you will buy, and sell, each month, to see how your cash position is impacted. You may be surprised by that picture!!

Is the sales projection reasonable at a flat rate of 1000 per month? Seems unusual that month 1 volume is equal to month 12. No ramp up period for volumes? No early stage discounting to promote unit sales?

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