Knowing the exact amount of revenue that your business generates is crucial. The key to doing so is to maintain the correct perspective. Many people may get bogged down in extraneous details. But the most crucial thing is to make sure that your reporting is accurate, practical, and efficient.
You Need a Clear Idea of Cash Flow
The first insight that accurate revenue reporting will give you is a clear idea of how your cash is flowing as it will give you the information you need to make informed decisions in the future. Using modern systems such as the new ASC 606 system is an example of how to do this. If you are just making the switch, you may want to research ASC 606 vs IFRS 15 to get a better understanding. Having a solid understanding of your cash flow is imperative for financial planning which means the difference between success and failure in your future operations.
Cash flow information is also needed in order to keep your internal and external stakeholders fully informed. They will rely on this data to make their own decisions. To do so, stakeholders will require a system that gives them an accurate profile of your financial health which, in turn, helps them decide how much to invest. Keep in mind that a history of inaccurate reporting will damage your company’s reputation and value.
Keeping your reputation intact is a matter of the highest importance. Without a good reputation, your branding efforts will be for naught. If word gets around that your company isn’t worth what you claim, you can be in serious trouble. Not only will your sales and other activities suffer, but you may also be in legal hot water. This is the kind of reputation damage that can destroy a company.
What Questions Can Revenue Reporting Answer?
Revenue recognition is most crucial at the point where your business has actually earned its money. At this point, revenue is recognized after all performance obligations are considered fulfilled. The dollar amount will now be easily measurable. An obligatory performance is now provided. This will constitute a promise to provide a “distinct” good or service to a customer.
This is a transaction that may seem simple. However, the definition of a performance obligation may vary. The way in which it is fulfilled may likewise vary. The time at which it is considered fulfilled may be a matter of opinion. These are factors that will need to be carefully monitored.
The revenue recognition principle operates by a single principle. Revenue is not recognized when the cash is received. It is recognized when the product is delivered to the customer. This places the emphasis on the result. This keeps the entire process tidy.
Are Reporting Standards Always the Same?
Revenue recognition standards can vary based on a number of factors. These include your accounting method as well as your geographical location. Other factors may include whether your business entity is public or private. All of these factors need to be taken into account when reporting.
You also need to be aware of the revenue recognition principle. This is a key feature of accrual-basis accounting. The principle dictates that companies should not recognize revenue when they receive payment. Rather they should recognize it in the moment as it is earned. This helps to keep the records tidy rather than littered with revisions.
This is one of the main reasons why the FASB released ASC 606. The system provides a five-step framework for recognizing revenue. This move was made in order to standardize certain processes. Chief among them was revenue recognition. The easier this process becomes through the new system, the sooner it can be assimilated to reflect profit.
Accurate Financial Reporting Keeps Your Business Secure
The best way to avoid trouble of all kinds is to keep an eye on your finances. Knowing how much money is coming in helps you plan your spending. This way, you will know exactly how much money can be saved. You will also know how much to invest in future projects. This is the knowledge that will keep you consistently in the black.
