This is for Business Owners and #CEOs
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Dear Business Owners/CEOs,
If you don’t understand anything in #Accounting and #Finance, please know the basics so that you don’t end up in the situation featured below.
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Hurray! Mr A, who has a very brilliant idea has just qualified for the grand finale of the Oleyo Group Foundation pitch competition. It’s been a very tedious journey before now. Guess what happened next!
Mr A began his fantastic pitch, and all of the investors were already wowed by his ideas and solutions until Muhammadulfatiu – One of the Lead Investors and a friend of Iwelabi commented on the Financial Projections.
Muhammadulfatiu: Mr A, could you please explain how you arrived at your N80m Revenue in year 1?
Mr A: With a big smile and a lot of self-assurance. That is the total amount of subscriptions we expect to receive in our first year. As earlier stated, we use a subscription revenue model. In addition, we offer three plans: monthly, quarterly, and annual. By the end of the first year, we expect to have 5,000 subscribers in total, with 60% of them on annual plans.
MF: I’m trying to fathom what you’re saying. Assume you make N15m in annual subscriptions in Nov 2022; how much will you recognize as revenue for the month?
Mr A: Total revenue for that month would be N15m plus monthly and quarterly subscriptions.
MF: Looking speechless… Do you have any finance person on your team?
Mr A: Not yet. We plan to engage one when we start fully.
MF: No wonder. Please come back when you finally engage one.
Mr A: Looking confused… You say what, Sir?
MF: Yes, that’s it. We won’t be funding you at this time.
MF: If you don’t understand the difference between Sales and Revenue right now, I’m not sure you’re ready for business or even know what you’re getting yourself into. To make matters worse, you don’t have a single finance professional on your team, let alone a CFO.
MF: Even you, as CEO, should understand that the N15m you made on annual subs in Nov should be referred to as sales rather than revenue.
MF: As taught by Iwelabi, Sales is the total amount of money made/received from offering a service or selling a product over a period of time, regardless of whether the service was rendered or not. Revenue, on the other hand, is the total portion of sales earned when a product or service is sold/rendered.
MF: To be precise, the N15m annual subs made in Nov 2022 would be considered a sale because the customers haven’t used your service for a year but have paid for it. To recognize revenue for that month, divide the sales by 12 (amortisation), N15m/12 = N1.25m. This is your revenue at the end of the month after you have fully provided the service. And you would have earned N2.5m on the sales by the end of the year, Dec 2022. This means that out of the N15m you made in Nov, you are only to record N2.5m in revenue.
MF: Say you record N15m as your sales. what happens if a customer says he or she is no longer interested in your service after you have recorded N15m?
Mr A: Remains silent and feeling disappointed.
MF: Don’t be let down. It’s a stage of development. As a business owner who will be responsible for investors’ money, you must not take basic finance knowledge lightly.
MF: You’ve got great ideas, Mr A. Please do come back later.
MF: Next candidate, please.
Cheers,
Iwelabi.
