Finance can be a complex subject. Many people are not clear about what different financial terms mean. For example:
Is Revenue same as Sales?
Is Revenue part of Sales or vice versa?
What is the relationship or difference between Revenue, Sales and Income?

To take it to an extreme, I once encountered a company that recognized revenue solely based on its monthly invoices. If you're wondering why this might be problematic, I highly recommend you read the rest of this article 😊.

In this article, I want to break down and demystify financial terms often used in service-based businesses, shedding light on revenue, sales, billing, and income to provide clarity and understanding.
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Why Understanding Financial Terms Matters

Knowing these financial terms is important at multiple levels — organizationally, within teams, and individually. It serves as a vital tool to decipher meaningful insights within the financial noise.

At the organizational level, a lack of understanding by leadership can impact a company's performance detrimentally. Misinterpretation of financial terms can lead to costly mistakes.

Within teams, a common understanding of financial terminology promotes effective communication and keeps the focus on key numbers. Misconceptions often arise when these terms are conflated, leading to confusion among team members.

For an individual contributor, grasping financial terms helps you understand how what you do is linked to the company’s revenue generation process.
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Understanding Revenue

Revenue, as defined by Investopedia, is the total income generated by a company from its operations before subtracting any expenses.

Revenue = Sales (from core business) + Proceeds from one-time/ad hoc activities (e.g., sale of property or other fixed assets such as machinery).
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Revenue vs Sales

Sales represent the proceeds derived from selling goods or services to customers.

For service-based businesses:

• Sales is the selling of people’s time and less likely to incur 3^rd party costs;
• Therefore revenue can be equated to sales (assuming no proceeds from other adhoc activities)

This does not apply for all industries and illustrates how important it is to consider industry specifics when analysing financial data. 
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Revenue vs Billing

Billing is the total amount on an invoice. It is the total amount of the cost of goods or services billed to a customer, usually covering purchases made or services rendered within a specified timeframe.

Billing (invoice total) - Costs related to service provision = Revenue

When there are no third-party costs associated with an invoice, revenue is equal to billing amount.)
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Revenue vs Income

Income, within a financial context, represents a company's bottom line—earnings remaining after deducting all expenses and additional income. It is a key figure on a company's Income Statement (Profit & Loss Statement). It serves as a critical indicator of a company's profitability.

Income = Revenue - Expenses

Income reflects the efficiency with which a company manages its spending and operating costs.
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Revenue Recognition for Service-Based Businesses

For service-based businesses, actual revenue depends on work done. Revenue should be recognized based on services delivered. It is separate and NOT dependent on pre-billing (where clients are billed in advance), billing or invoicing.

Revenue recognition depends on the category of client and scope of work:

• ‍Retainer clients: Where there is a pre-determined scope of work each month, revenue typically aligns with the agreed-upon monthly fee.‍
• Project-based clients: Revenue can be recognized based on A. percentage of the project completed or B. predefined project completion milestones, such as phases or progress markers. Both scenarios are illustrated belo(w.

A. Percentage of project completion

B. Predefined project completion milestones, such as phases or progress markers

Conclusion

For service-based businesses, understanding financial terms—like revenue, sales, billing, and income—is crucial. These terms work together to create a comprehensive financial understanding.

Think of revenue as the core income source, primarily generated from selling services, which translates to "selling the team's time." Sales, billing, and income play complementary roles in this financial ecosystem, each offering unique insights into the company's financial health.

By grasping these concepts, service-based businesses can better navigate their financial landscape, aligning their work with financial success. It's all about making sure all your amazing creative work translates into a healthy bottom line.