Revenue is the lifeblood of any business. It measures success, informs decision-making, and determines financial stability.
However, recognising revenue isn’t as straightforward as simply recording every pound that comes in. Proper revenue recognition ensures that your financial statements reflect the true economic performance of your business.
In agencies this is even more specific, given the often mixed nature of Retained work and Project work that we see in so many of our clients.
I want to help you understand what correct revenue recognition is, why it matters, and how getting it right impacts your agency.
What is Revenue Recognition?
Revenue recognition refers to the process of recording revenue in your financial statements when it is earned and realisable, not necessarily when the cash is received. It ensures that income is reported accurately in the correct accounting period. This principle is guided by accounting frameworks and legislation.
Key Principles of Revenue Recognition
To determine when and how to recognise revenue, agencies generally follow these five steps:
- Identify the contract with a customer.
- Identify the performance obligations in the contract (e.g., delivering goods or services).
- Determine the transaction price (the total amount expected to be received).
- Allocate the transaction price to each performance obligation.
- Recognise revenue as the performance obligations are satisfied.
For example, if your business won a long term project, you wouldn’t recognise all revenue upfront. Instead, you would spread it across the period of the contract as and when the service was delivered.
Why Does Revenue Recognition Matter to Your Business?
- Accurate Financial Reporting Revenue recognition ensures your financial statements reflect the actual state of your business. Overstating or understating revenue can mislead stakeholders, including investors, creditors, and management.
- Compliance and Avoiding Penalties Adhering to the appropriate revenue recognition standards (such as IFRS 15) helps you avoid regulatory scrutiny or legal penalties. Non-compliance can result in audits, fines, or reputational damage.
- Informed Decision-Making Properly recognised revenue helps management assess profitability and make informed decisions about growth, pricing, or resource allocation. Misstated revenue will often lead to complacency and poor strategic decisions.
- Investor and Lender Confidence Accurate and transparent financials build trust with investors and lenders. They are more likely to support your business if they can rely on your numbers.
- Aligning with Business Models Different business models require different approaches to revenue recognition. For instance:
- Retainer based businesses recognise revenue over time.
- E-commerce companies recognise revenue upon product delivery.
- Design & Build agencies may use percentage-of-completion methods for long-term projects.
- Understanding and applying the right method ensures consistency and clarity.
What Happens When Revenue Recognition Goes Wrong?
Errors in revenue recognition can lead to severe consequences, including:
- Restatements of financials, which can damage credibility.
- Delayed funding, as investors may question your business’s stability.
- Inaccurate tax filings, potentially leading to audits or penalties.
Over the years, we have seen many high-profile scandals, as we did with We Work, that show how improper revenue recognition can lead to massive corporate collapses.
How to Get Revenue Recognition Right
Here are some tips for ensuring proper revenue recognition:
- Understand the Standards: Familiarise yourself with the legislative guidelines relevant to your business.
- Invest in Robust Accounting Systems: Use accounting software that supports your revenue recognition needs, especially for complex business models.
- Train Your Team: Equip your finance team with the knowledge to handle revenue recognition accurately.
- Work with Experts: Work with specialists such as MAP who have the regulatory knowledge alongside the Agency sector experience.
When I talk to my clients about revenue recognition, I know it can sometimes feel like just another technical accounting concept, but its impact on your business is significant. By recognising revenue correctly, you not only ensure compliance with accounting standards but also build a solid foundation for financial transparency, owner value clarity, investor trust, and long-term growth. Whether you’re starting your Agency journey or running a well established Agency, getting revenue recognition right should be a priority.
If you’re unsure about how revenue recognition applies to your agency, then just give us a call.
