Monthly Revenue Tracking

The most important starting point for most businesses to track each month is revenues, but what figure should businesses look at? The clear and logical answer is that you should track monthly billings and yet I have seen a number of businesses that track collections instead.

Collections are important and you will never hear me denigrating the importance of measuring cash flow, but this is not the place where they should be measured. The object of this portion of the Key Performance Indicators exercise is to measure operational performance and to accomplish that it is essential to measure things on a consistent and rational basis.

Cash collections simply do not accomplish that and if you are measuring revenues on a cash basis then the amount reported will vary with the timing of cash collections and you will not have a clear picture of what is really going on in the business. The problem is that the amount of cash collected in a measured period has nothing to do with underlying profitability, and all it measures is how much cash you collected. A simple example will illustrate this.

You are measuring revenues based on cash collections. Your largest customer sends you a check for $100,000 for work completed two months ago and month end falls on a Saturday. If the check arrives on the Friday, then the month is boosted by $100,000, making it look profitable. If the check arrives on Monday, the $100,000 goes into the next month making that month look profitable.

This skews the figures considerably, and the reality is that the deposit doesn’t belong in revenues for either month and should have been recorded two months previously when it was billed. That way revenues are matched with the costs of delivering them and if everything is recorded in the proper period then the resulting profit number has a better chance of being accurate and representing the true profitability of the company.

It is important to track revenues as a Key Performance Indicator each month. They are also the number from which a whole host of important measurements and financial relationships are driven and it is essential that they are properly recorded if you are to have an accurate picture of what is going on in the business.