How to accurately calculate, classify and record service revenue
Here are the steps to calculate service revenue:
Step 1: Detect and classify revenue
It's hard to know which revenue sources your business should focus on, given that there are multiple options for generating income. To achieve this and get a grip on the financials in-depth no matter what type of customer you serve; it's important to track all possible sales performance data points such as:
- How much did we sell?
- Who bought from us last week or month (or year)?
- Which channels do customers use to come into contact with our company before making their purchase decision—online vs offline ads/social media?
- What services did these prospective buyers look up online before finding ours?
Step 2: How to calculate service revenue
To calculate the percentage of service revenue against total sales, take your service revenue and divide it by total sales. Next, multiply this by 100%.
For example, if you're generating $2 million in sales revenue per year, and half of that is from services, first find out how much money you made from each service. If one of your products is service and product combined, then take the revenue from services and divide it by the total revenue. Next, multiply this by 100 to get your percentage.
If your company's generating $1 million in revenue from repair work and $500,000 from other types of services such as tax advice or web design, you can calculate your service revenue percentage by taking the $500,000 of services revenue and dividing it by the total sales, which is $1.5 million. Multiply that number by 100% to get your percentage.
Service revenue = 500,000/1,500,000*100 = 33.3%
Step 3: Record service revenue on an income statement
This step takes care of explaining and presenting your annual service revenue to the public. It's crucial to include this number on your income statement because it can help investors pinpoint where they should focus their money if they want to make a difference in your business's finances.
For example, if you're using QuickBooks as an accounting platform, you can create an "Income" account and label it as "Service Revenue." To get the name of this type of account, open your Chart of Accounts and select which one you want to use.