Editor’s note: This is a guest post by Wilson Lee.
In the persistent quest to obtain greater insight into business performance, companies must identify their own key performance indicators(“KPIs”) for organizational health and performance. Best-in-class companies religiously track their KPIs, often creating dashboards and leveraging real-time reporting tools in order to provide management with a real-time view on how their business is performing, as well as highlighting areas that need special attention.
One such KPI is revenue performance. As a business owner, entrepreneur, or finance leader, being able to break down your revenue by product or service type, market segment, sales channel, geography, and whether revenue is coming from new or existing customers is invaluable information in helping understand business performance. Even entry level accounting packages can provide these insights, provided you do some upfront planning as to what type of revenue information you would like to report.
Typical Revenue Reporting
As an illustration, below is what many companies typically report as their revenue detail:
The reporting shows that revenue doubled, with subscription revenue growing 125 percent and other revenue remaining flat. This level of information, while appropriate for external and summarized reporting, provides very little information for internal management analysis. Additional revenue information must be obtained by other means and analysis. Enter KPIs!
Customized Revenue Reporting
In order to drive greater insight into revenue performance, you will need to customize your chart of accounts. The chart of accounts provides the structure for how information will be stored and reported from your accounting system and will impact the quality of information that you can obtain as your company grows over the years. Do it right, and you will capture meaningful data within your accounting system for monthly reporting. Do it wrong, and you will spend more time trying to compensate for the limited reporting data available in your accounting system by gathering data from other sources.
In the example below, the chart of accounts has been customized to report revenue by sales channel, product type, new vs. renewing customers and geography:
Some additional insights from this level of revenue visibility based on this illustration:
- Subscription revenue from new business grew from $800,000 to $1.35 million.
- However, subscription revenue from renewing customers was only $450,000, which, compared to prior sales, represents a renewal rate of 56 percent. Drilling deeper, the data indicates that renewal rates for online sales was only 25 percent a renewal rate of 75 percent for inside sales, highlighting a serious issue that needs further investigation and resolution.
- The fastest growing revenue segment was the inside sales team targeting the Canadian market, which grew by 400 percent . This performance disparity compared to the rest of the sales segments is worth investigating for potential insights and learning that can be applied across the rest of the inside sales organization.
Improved insight on revenue performance or most other financial KPIs can be achieved by customizing the chart of accounts in your accounting system. Setting up the right chart of accounts early in a company’s lifecycle allows KPI data to be captured and measured on a consistent basis month after month, providing a rich set of trended financial data to monitor the progress of the business.
About the Author
Wilson Lee has over 20 years of experience operating and scaling technology companies and is the founding partner of BrightIron www.brightiron.com. BrightIron was created to fill a void for founders and CEOs of growth technology companies by providing access to a team of seasoned C-level finance and sales executives, on a fractional, on-demand basis to help drive growth in enterprise value.
Wilson can be reached by email at firstname.lastname@example.org.