11 minute read
Don’t Recognize Sales as Revenue
Sales and revenue are different but unfortunately are used interchangeably. If you report sales instead of revenue on your profit and loss statement, it might be wrong. Why?
A Sale is a Sale is A Sale
A sale is a sale. Revenue is that portion of the sale that is billed and accounted for. If your company collects all sales COD, then revenue equals sales each month. Most companies have maintenance revenues and maintenance sales which are upfront payments for future work and not revenues at the time the maintenance plan is sold.
Here are examples where sales and revenues are not equal.
1. Example A – A project that takes 4 months to complete
You sell a $1 million project which is to be completed over 4 months. The sale is $1 million. The entire $1 million does not appear on your profit and loss statement the month that it is sold unless the entire project is completed in a month. If the entire job is completed in a month, sales and revenues are the same.
If the project is performed over a period of months, generally the project is billed over several months.
The revenue, which appears on your profit and loss statement, is the amount that is billed for that month. The total revenues, over the period that the project is completed, equal the sale amount. If the project takes 4 months from start to finish, and a quarter of the project is completed each month, then the revenues that are accounted for on your profit and loss statements are $250,000 a month… not $1 million. The expenses incurred to produce those revenues are also in the same month.
2. Example B – A maintenance program paid in advance (or on monthly billing)
Assume your customer pays you $250 each January for their maintenance plan. The maintenance is performed in April and October.
The sale is $250. It is NOT revenue. The sale is recorded as a $250 deferred income on your balance sheet rather than a $250 sale on your profit and loss statement.
Financial Fruit Salad
So, if we look at that example again, in it we can see that you received money for work you have not performed yet. This is a liability to perform work.
When you do the first maintenance in April, your liability to perform is cut in half. $125 is now recognized as revenues on your P&L and your deferred income is cut in half.
In January you have revenue with no matching expenses. In April and October, you have expenses with no offsetting revenue.
If you were to account for the maintenance sale in January, then in all three months you would have a financial statement fruit salad. January’s profit and loss statement would look better than it should (higher profits because there are revenues and no expenses incurred in producing those revenues). April’s and October’s profit and loss statements would look worse than they should (lower profits because there are expenses and no revenues to offset those expenses).
You must recognize the revenue in the month you performed the activities. If you don’t match revenues with the expenses incurred producing those revenues, you have financial fruit salad. This is where you account for revenues in one month, the apple month, and expenses in another month, the orange month. When you job-cost those jobs and analyze your financial statements you have apples and oranges, i.e. fruit salad.
With financial fruit salad, your gross margins are not consistent. They can be negative in the months that you purchase a lot of material and equipment which is not considered inventory and has not been used on jobs. Consequently, you have no idea whether the company is truly profitable.
In addition, counting sales as revenues is why I often hear the complaint, “We’re busy and losing money.” If the maintenance program is priced and accounted for properly, you’ll be busy and at least breaking even because the revenue and expense are accounted for properly.
Accounting for Maintenance Service Properly
Here’s how to account for maintenance properly. You’ll need a maintenance savings account in current assets and a deferred income maintenance account in the current liabilities section of your balance sheet.
Looking again at Example B above:
• January: Debit your savings account for $250 and credit deferred income maintenance for $250
• April: Debit your deferred income maintenance account for $125 and credit maintenance revenue for $125
• October: Debit your deferred income maintenance account for $125 and credit maintenance revenue for $125
Your balance sheet should always show the maintenance savings account amount equal to or greater than the deferred income maintenance account. Make sure that revenues, not sales, are recorded on your profit and loss statement. This will help ensure consistent gross margins and help avoid financial statement fruit salad. u
Ruth King has more than 25 years of experience in the HVACR industry and has worked with contractors, distributors and manufacturers to help grow their companies and become more profitable. Contact Ruth at ruthking@hvacchannel.tv or at 770-729-0258.
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Publisher, Terry Tanker sat down with Jamie Vaughn, Owner of Jay’s Heating, Air & Plumbing, to talk about early beginnings, rebranding, and expansion.
1. How did you get started in the business?
I started early (laughs). My grandfather was in business, and I have a picture of me carrying his tool bucket on a job when I was six. My father followed my grandfather, I followed my dad, and my son is now with the company. At one point we had four generations in the business which made us all very proud.
2. Congratulations on being a Tops In Trucks winner. How many vehicles are in your fleet?
There are nineteen vehicles in total. We have Chevys, Nissans, GMC, and Rams. There is an assortment of vans, pickups, and box trucks.
3. Why did you decide to rename and rebrand?
Over time, I discussed our brand with trusted associates at professional contractor events. An advisor said, “If a customer sees you, they may remember you. They may know who you are. But your current branding doesn’t portray the professionalism you bring to the market. That struck home with me, and I realized it was time to make a change.
4. How did you come up with the idea for this fleet design?
We formerly operated under J’s HVAC Unlimited, LLC. “J’s” represented my family’s names, Jamie, Joanie, Jackson, and Julianna. With help from our designer, the jaybird mascot in the design allowed us to create a sleek and simple design that stands out in our community.
5. How did you choose the colors for your company logo and fleet design?
After we came up with the new logo for “Jay’s” we wanted to go with a color scheme that would enhance the blue. After combining other various color palettes with the blue, we found the orange and blue combination to be vibrant and happy.
6. When was this design implemented?
Our journey of rebranding and creating a new logo began in Spring 2022. Our first truck with the new logo went on the road in August 2022.
7. Is this design part of a larger company branding initiative?
Yes, it was an entire company rebranding which also incorporated the fact we expanded into plumbing.
8. Where are you positioned in the market?
We are the leader in our market, and it’s crowded. We’re in Mount Airy NC. It’s a smaller market, probably 10k-12k people. But there are close to 80k countywide.
9. Do you have plans to expand?
We’re right at the Virginia and NC border. We service both states, within a 60-mile radius of our office. We plan to open additional offices deeper into Virginia, or maybe another location closer to Charlotte.
10. You decided to expand into plumbing – Why?
We were giving away too many customers. Customers would ask if we offer plumbing services. At the time we didn’t and would refer them to another company. The problem is that the referral came with an expectation to deliver the same quality of product and service Jay’s delivers and many times the quality wasn’t up to our standards. In the end, I decided it was a good business for us to be in. And we could deliver the 5-star service we’re known for.
11. How long did the rebranding process take?
It was one year from start to finish. We met with the design team in February, started wrapping the fleet in the fall, and finished the office integration in March.
12. What was your total investment? It’s very close to $250,000.
13. Did you have a set budget before you started?
Yes, it was a hundred thousand dollars, but as we got going, we decided to do more because we liked it so much. As I mentioned we did the office, signage, uniforms – everything.
14. How did you communicate the rebranding to your employees?
I introduced it during one of our team meetings. I explained the rationale which included wanting to make it fun and a reason for camaraderie.
15. Were the employees involved in the process?
They were. We have a chat room where we’re always going back and forth, celebrating the little wins of the day, “Hey, so-and-so sold this job. We just got a fivestar review.” I used the chat room to showcase three designs that I thought would work. And I asked for their input. I wanted them involved in the design process.
16. How did your employees respond? We wanted them to help with the design. Allowing them input made them feel as though they were a part of the process. Their opinion matters to me. In the past, there wasn’t any excitement about putting on the uniform but now there is. Newfound enthusiasm includes not only wearing uniforms but also driving around our service area in the newly wrapped fleet, and having pride in the office.
17. What was the most challenging aspect?
Toward the end, just putting the finishing details on everything was a lot. I’m not a detailed person more of a big-picture person. And, when you do something this significant, there are so many details that must be covered. Many of them you expect, and many others that arise as the project unfolds.
18. Have you seen a return on this investment?
Yes, we are starting to see a return on the investment. We track our marketing, as well as ask our customers how they heard about us. If they use the tracking number, it populates with the call. We like hearing how they heard about us. Some tell us they have seen our vehicle either on the highway or in their neighbor’s yard.
19. How have customers responded to your fleet design?
Our former design was fire and ice, a very busy design. We had people in our community that did not know what HVAC represented. They would tell us they could not read the number. While they did notice us, the fact they could not relate to the service of our business, or read the phone number, was an issue. Our customers love the new design. Some of our staff have been stopped by community members (while at other businesses) with feedback on how much they love the new design. Other businesses have also expressed the same thing.
20. What element of your fleet design do you feel is most important for helping you stand out from your competition?
The design is simple, sleek, vibrant, eye-catching, happy, and inviting. It is more than just the name, the list of services, and the phone number on a vehicle. We are the only HVAC company in our local community with wrapped vehicles.
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