Finance explained to my mother-in-law. Chapter V – Revenues

In Profitability Analysis there are different types of Revenues:

  • Turnover
  • Reinvoicing of expenses
  • Other revenues
  • Financial income
  • Multi-year orders

The most important concept is that of turnover.

  • It is the first line of the Income Statement and the denominator of many financial indices.
  • Turnover includes only the sale of products and services that are the main object of the company’s activity and can be broken down by product / product line, market, geographical area, operator, etc..
  • Since costs and turnover are linked by a ‘deterministic’ ratio, the entire income statement is derived from the declination of turnover.

A distinction has to be made between turnover and customer payment.

Moreover, it is not sufficient to issue an invoice to record turnover. They are necessary:

  • An order
  • A price
  • A delivery
  • An invoice

When one or more conditions are missing, you can still account for an Invoice to Issue.

At the end of the period, the Invoices to be issued or Credit Notes to be issued (if some negotiations with retroactive impact in the period to be closed have not been settled) are included in the “actual” invoices in order to have a complete and definitive view of the turnover to which the rest of the Income Statement can be measured.

Reinvoicing of expenses

  • All expenses that do not count for the company must be re-invoiced (e.g. a fine taken from a seller at 200 kmh of motorway and addressed to the company’s CEO, etc.).
  • In a “by destination” logic the re-invoicing of expenses is generally presented as a deduction from the related expenses and not in the turnover

Other revenues

These are residual revenues, which are presented in the income statement in a line called “Other operating revenues”.

  • It does not include the resale of raw materials, because it is deducted directly from purchases, nor financial income, because it is included in the financial result in the lower part of the income statement.
  • It may include, for example, insurance compensation and certain royalties.

Financial income

There are two types: dividends and interest.

  • The distribution of dividends is related to the investment in any subsidiaries.
  • Interest is paid on cash accounts.

Multi-year orders

  • If, for its core business, the company carries out projects for goods or services over a period of several years, the turnover and profit and loss account will follow the rate of progress of the work.
  • There are other methods of presentation for multi-annual orders, but at this point my mother-in-law has completely given up and is already starting to prepare the lasagne for tomorrow…