Earnings Statement Part 2

Quick reference

• 00:02 >> Hi, I'm Ray Sheen.
• 00:04 I'd like to continue talking about the earning statement.
• 00:07 This time, I will focus on the income, or revenue side of the earning statement.
• 00:13 A quick review.
• 00:14 The earnings statement has revenue and expenses that occur over some time period.
• 00:19 When the expenses are subtracted from the revenue what is left is the net income,
• 00:24 earnings, profit or loss.
• 00:26 Revenue is the money that we get from customers for selling products and
• 00:30 services.
• 00:31 This is the money coming into the business.
• 00:33 It includes the money from selling all products and
• 00:36 any services that are provided for sale.
• 00:38 It includes both wholesale and retail sales by the company.
• 00:42 Revenue could also include special one-time items,
• 00:46 such as selling a building or a piece of equipment.
• 00:48 But these are typically tracked as a special category of revenue,
• 00:52 since they are not part of the primary business operation.
• 00:56 Remembering that the earnings statement is always based upon a period of time,
• 00:59 such as a month, quarter, or
• 01:01 year, the revenues shown on the statement is that revenue for a period of time.
• 01:07 In a business using the cash basis for
• 01:09 accounting, the revenue is the money that is collected during that period.
• 01:14 It literally means that amount of money that goes into the business account or
• 01:17 cash register.
• 01:19 For business using accrual basis, it is the amount of the invoices for
• 01:23 products and services that are delivered to the customer during the time period.
• 01:28 The customer may not yet have paid the bill, but the business still takes credit
• 01:32 for the sale if they delivered the product or service.
• 01:36 Let's dig a little deeper into the concept of total revenue.
• 01:40 Total revenue is often referred to as the topline
• 01:43 because it is at the top of the earning statement.
• 01:46 When you hear people use the term, the top line, where that they had top line growth.
• 01:50 They meant growth in sales and revenues.
• 01:53 Since the top line is sales on the earning statement,
• 01:55 it only makes sense that the bottom line is net income or profit.
• 01:59 Another characteristic of total revenue is it is normally a net number.
• 02:04 That means that any sales discounts, rebates, or
• 02:06 coupons are subtracted from the sales price.
• 02:09 These sales incentives are not treated as a cost in the operating expenses.
• 02:14 This gives a truer picture of the amount of money that came in,
• 02:16 and what the customer is really paying for the products or services.
• 02:20 So total revenue is the sales price minus any sales incentives offered
• 02:25 to customers at the time of sale.
• 02:28 The last point I want to discuss is the strategy for increasing total revenue.
• 02:32 These are operational strategies, not financial manipulation.
• 02:36 Many times finance will ask if there's any way to increase total revenues.
• 02:40 There are essentially three options open to you.
• 02:43 First, and the most obvious,
• 02:45 is to sell more stuff, more products or more services.
• 02:49 The more you sell, the higher the revenue.
• 02:52 Now how do you sell more?
• 02:53 Well we'll probably take more advertising or sales efforts, and that can cost money.
• 02:58 So be sure that you have the money for that extra effort.
• 03:01 So lets say I sell 100 units a month with a list price of $100 and
• 03:05 a sales rebate of 10%.
• 03:07 That means the total revenue for the month is $9000.
• 03:11 If I sell five more units, my total revenue increases to $9,450.
• 03:19 Another option is to raise the price on what you already sell.
• 03:22 Now, of course, there's always the price and demand curve to take into affect.
• 03:26 If you raise the price, you may the lower the demand and
• 03:29 ultimately have less total revenue, because you sell fewer units.
• 03:33 By the same token, if you lower the price you may sell more and
• 03:37 ultimately have higher total revenue because you sell more units.
• 03:41 If instead of selling more units, I sell the same number but raise the price from
• 03:45 $100 to $105, I will again have total revenues of $9450.
• 03:52 Keep in mind, in some markets, the price is indicative of the quality, and
• 03:56 can influence the buying decision.
• 03:58 I have an acquaintance that developed a new medical device that was far superior
• 04:02 to the equipment in use.
• 04:04 His business was limping along with low sales.
• 04:07 And he was contemplating going out of business.
• 04:09 When one of his senior staff suggested that,
• 04:11 before they do that, they raise the price dramatically, nearly doubling it.
• 04:16 They almost immediately sold out and had an order backlog.
• 04:20 It turns out that when the price went up, the hospitals and clinics looked at
• 04:24 the device and realized it wasn't just another me too device on the market, but
• 04:28 that it added tremendous value for them, and they gladly paid the higher price.
• 04:33 The third option for raising total revenue is to reduce or
• 04:37 eliminate the discounts and rebates.
• 04:39 While this doesn't change the listed sales price,
• 04:42 it does increase the effective sales price.
• 04:44 So using our example of selling 100 units a month at a listed price of
• 04:49 100% per unit and a rebate of 10%, if we change the rebate to only 5%,
• 04:55 in this case the total revenues would now be $9,500.
• 05:00 Total revenue is a fundamental element of managing operational finances.
• 05:07 It's the top line of year end statement, and is something that you,
• 05:09 as an operational manager, need to watch very closely.

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