Service revenue is the money your company earns from selling its services: chauffeuring, planning funerals, maintaining lawns, photographing a wedding and others. When you draw up your company's income statement for the year, the month or the quarter, you calculate your service revenue for that period. You enter it along with other data on the income statement to derive your net service income.
What Is Your Revenue Stream?
Your revenue stream or streams is whatever goods or services generate income for your business. For retail businesses, the revenue stream is the sale of items in their stores. For manufacturers, it's typically making things and selling them to other companies. For service companies, it's offering services to customers to earn service revenue. Accountants class all these different revenue streams as operating income. Whether the source is services or sales of products, all operating income streams get the same treatment on the income statement.
Everything else you do that brings in money is a non-operating revenue stream. If your company has money invested and is earning interest, you get interest revenue. If you rent out an unused warehouse, that's rent revenue. Non-operating revenue gets its own separate line on the income statement. That way anyone reading the statement can see how much service revenue your company earns, without non-operating revenues confusing things.
Tracking Service Income
If you run your business on a cash basis, you record your service revenue in the ledger whenever your customers pay you. If you operate on an accrual basis, you record revenue when it's earned. Suppose that your landscaping business does a $1,000 job for a homeowner. Under accrual accounting, you have $1,000 in revenue as soon as you've finished the job. When you draw up your income statement, you include that money in your total service revenue. Cash-basis accounting only recognizes the money when your customer pays you. You don't include it in the income statement until then.
If you use standard double-entry bookkeeping, you'll enter every payment in two places. Say you receive $100 for fixing a customer's shorted-out light fixture. If they pay you immediately, you enter $100 in the service revenue account and $100 in cash. If you have to wait for the money, you will enter $100 in accounts receivable instead of cash. When the payment comes in, you subtract it from accounts receivable and add it to cash.
Doing this regularly makes it easy to calculate your service revenue. Look at the total figure in your revenue account, and you've got the answer.
Writing the Income Statement
Your income statement is a revenue equation. Take your service revenue and any other revenue streams your company generates. Subtract expenses. What remains is your net income for the period. There are two main revenue equations, one simpler than the other but providing less detailed data.
With the single-step income statement, the top of the document shows revenue and gains: operating revenue, non-operating revenue and any gains, such as from the sale of long-term assets. Total up all these different items, then total up all your expenses. Cost of services includes any costs directly involved in doing the work, such as driving to a client's office to complete an IT job. Other expenses could include money spent on advertising, office equipment, sales commissions and interest on loans. These are collectively called revenue expenses or expenditures. Subtract expenses from revenue and the equation gives you your net income.
The multi-step income statement takes more work than the single-step, but it provides more details. The first step is to subtract the cost of services from net service revenue, giving you the company's gross profits. Then you add up your operating expenses, such as advertising, repairs and office supplies. Subtract the total from gross profits to get your operating income.
If you have non-operating revenues or non-operating expenses, you add them all together to derive the total non-operating income. Add that to your operating income to get your net income for the period.
Cash Versus Revenue
Calculating service income shows you how profitable your company is. If you're running your business on an accrual-basis, however, it's possible to have fantastic service revenue and be short on cash. That's why businesses also make out a cash flow statement showing how much money, including checks and credit-card payments, has changed hands.
If you have a profitable quarter with lots of clients running up billable hours, that's great. But if they haven't paid yet, you could end up the quarter without enough cash on hand to pay your staff or your rent. Low or negative cash flow is a warning sign you may need to cut expenses or push customers to pay up faster.
Reading Your Income Statement
If you run a publicly traded company, you have to put out an audited income statement every year to meet your legal obligations. Smart business owners and managers use the income statement as a source of information about their service revenue and net income:
- How much is your cost of services? If your costs eat up a lot of your revenue leaving little gross profit, is there a way to deliver your service more cost-effectively?
- How much is your net profit? If your gross profit looks satisfactory, but your net profit is small, are there administrative expenses you can trim to improve things?
- How does your income statement compare to competitors in your industry?
Studying Profit Margins
Your profit margin divides the bottom line of the income statement by the top. You take your net income for the period, then divide it by your net service revenue. If your service revenue is $150,000 and your net income is $75,000, you have a 50-percent profit margin, for example.
Knowing your profit margin doesn't, in itself, tell you how well things are going. Different industries have entirely different profit margins; retail clothing runs 7-to-12 percent, the telecommunications industry runs 10-to-15 percent and electronics retail runs 5-to-8 percent. Landscaping and bar bands are both service businesses, but they won't have the same profit margins. Compare yourself to other small businesses within your industry to get a feel for how well you're doing.
It's easy for manufacturers and retail businesses to quantify the items that affect their profit margins, such as the cost of raw materials, and figure out how to improve them. It's tougher with a service business because the elements that go into providing a service are harder to quantify. It's doable though:
- How much time and resources does it take to provide your service? Time tracking apps can help figure this out.
- Are you making the best use of your experienced employees, and your new hires? If there's any grunt work involved, it might be more cost-effective to assign that to the newbies.
- Project management, drafting bids, submitting invoices and billing clients all take time and effort. Can you make your company more efficient when it tackles these tasks? Would it make more sense to raise your prices to cover the costs?
- Which clients are the most valuable? There's an old rule of thumb that 20 percent of your clients generate 80 percent of your profits. If one client not only uses you but provides referrals that generate new business, concentrating on them and dropping less profitable clients might work out well.
- Accounting Coach: Income Statement
- Corporate Finance Institute: Revenue Streams
- Bench: Cash Basis Accounting vs. Accrual Accounting
- Accounting Coach: Accounting Basics
- Accounting Coach: What is a capital expenditure versus a revenue expenditure?
- Business Literacy Institute
- Inc.: Cash Flow Statement
- Bench: How to Read Financial Statements
- Patriot Software: How to Determine Profit Margin for Your Small Business
- Accounting Department: How to Determine Profit Margins on Services
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com