Revenue
Everyone thinks they know how much money comes into the company and how much it has. A customer has sent an advance of RUB 500,000 — what could be complicated about that?
Under accrual accounting, revenue is recognized as obligations to the customer are fulfilled in the relevant reporting period. Receiving an advance of RUB 500,000 does not mean that the entire amount has already been earned.
Recording earned revenue shows the result of fulfilling those obligations. Check available cash separately: recognized revenue may not yet have been paid, while advances received may be needed for future work.
The 101 app offers advanced analytics on the PRO+ plan. The help guide (in Russian) describes reports on expenses and project profitability. Tables and charts update based on the data entered, so you need to check that all transactions have been recorded and that the accounting settings are correct.
Hidden profit
In this article, “hidden profit” is the author's term for a markup that has not been disclosed to the customer. It is not a separate standard measure of profit: this section concerns transparency in pricing and agreements with the customer.
Consider a hypothetical example: the customer is shown a markup of RUB 100, but another RUB 50, presented as payment to a tradesperson, actually remains with the company. In this example, that RUB 50 is an additional undisclosed markup. The accounts must reflect the actual payments and contract terms; the example is not a recommendation to record payments this way.
Check whether the price breakdown shown to the customer matches the actual agreements. Transparent rules for markup and payment help you discuss costs without discrepancies in the documents.
Markup
Markup shows how much the price exceeds the chosen cost base: (price − cost base) / cost base × 100%, provided that the cost base is greater than zero. First, decide which costs belong in that base. Then assess fixed expenses, taxes, the profit you need, and demand. Account for purchases of long-lived equipment separately in your cash plan; depreciation may be recognized as an expense for the period.
Contribution margin ratio
To analyze how fixed costs are covered, use the contribution margin ratio based on variable costs: (revenue − variable costs) / revenue × 100%, provided that revenue is greater than zero. This is the share of revenue remaining after variable costs to cover fixed costs and generate profit.
Consider a hypothetical example: with revenue of RUB 1,000,000 and variable costs of RUB 800,000, the contribution margin is RUB 200,000, and the contribution margin ratio is 20%. This is not yet net profit. Assess whether RUB 200,000 is enough to cover fixed expenses and other costs excluded from the calculation. The required level depends on the economics of the individual company.
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Operating expenses
Here, we use “operating expenses” to mean the money a company spends to keep its business running:
- variable expenses that change with the volume of work, such as piece-rate pay for tradespeople;
- fixed operating expenses, such as office rent. Purchases of long-lived equipment and repayment of loan principal are accounted for separately; depreciation and interest may be included when calculating profit under the applicable rules.
To reduce the risk of a cash shortfall, plan the dates and amounts of future receipts and payments, check your available balance, and build a company reserve fund with the company's obligations in mind. A reserve alone does not guarantee that there will be enough money on every payment date.
Cash flow
A cash-flow report shows when money came in or went out, where it came from, and where it went.
A simple cash-flow report shows four amounts separately: the opening balance, receipts, payments, and the closing balance. For money in a single currency, the closing balance equals the opening balance plus receipts minus payments. The report helps you:
- see how much money you have in your accounts;
- optimize expenses;
- plan for the future.
Would you like to discuss your company's accounting and what 101 can do? Book a free 101 demo: an expert will show you the system and answer questions about your business needs.
