How should we think about sales?
Our firm—and most professional services firms—consider sales as distinct from revenue.
Sales. When our firm wins a new project, we negotiate a contract with the client. Usually, that contract includes a lump sum fee. Let’s say the fee is $500,000. Once the contract is signed, we count this as a sale of $500,000.
Revenue. The team begins work on this new project. As the work proceeds, we bill the client according to an agreed-upon fee structure. These payments are revenue.
The sale is the the total fee. The revenue is the portion of that fee paid by the client.
Because revenue is money in the bank, revenue is tied to our firm’s fiscal year. (Our books begin on 1/1 and close on 12/31.) If the project, as many do, stretches over multiple years, then we account for some project revenue in one fiscal year, and other project revenue in another.
Sales, on the other hand, are not money in the bank. It’s money we hope to have in the bank, of course, but not all sales are guaranteed. A significant percentage of sales will likely NOT translate into revenue. (Projects are delayed or cancelled or not funded all the time.)
This discrepancy means that our annual sales goals are 20-40% higher than our annual revenue goals.
Here’s the question our business development team wrestles with:
Should we bother tracking sales on an annual basis, or should we just focus on projected revenue?
On an annual basis, sales work a lot like revenue: everything resets on January 1. You have your revenue goal (money in the bank) and your sales goal (money you hope to have in the bank).
Say that your goal is $5,000,000. That means you aim for $5,000,000 in sales by December 31.
Projected revenue accounts for sales…but removes the realized revenue from that sale. Projected revenue is heckuva lot better way to evaluate the future finances of the firm than sales.
Taylor Coe 