Service revenue is an important metric for any business. You need to know how much service revenue your company generates per year and what percentage of overall sales it represents. Learn more below.
Service revenue is an important metric for any business. You need to know how much service revenue your company generates per year and what percentage of overall sales it represents. Understanding this number will help you better understand your company's financial health, which in turn will allow you to make more informed decisions about operations and investments.
According to Forbes, companies that combine service-based and product-based business generate more of their revenue from services than from products. This is a stark contrast to the global average revenue mix, which is typically around 50/50.
Typically, service businesses have to employ a different strategy from product-based business to get good returns. It has also been revealed that there are many ways to calculate service revenues so business owners need to know how they should be doing this calculation to get an accurate picture of their financial situation.
What is service revenue?
Service revenue is the net income a company earns from the services provided. It refers to all activities a company performs to generate economic benefits to the business and its customers. Service revenue doesn't include interest income or income earned from product shipments.
A service can be intangible or tangible and it may involve just one party, such as when a person pays someone to mow their lawn, while other types of services involve two parties, such as when a consumer hires an electrician to repair their home wiring.
Service providers often combine different types of skills in order to provide customer satisfaction, such as knowledge about how products work with expertise in fixing them. The type of service provider depends on what they offer, so you might hire an accountant if you need tax advice or take your car to get fixed at a mechanic's shop if something breaks down.
The major reason that service revenue isn't a current asset is that it's not directly related to any one company. It has more potential than other types of assets, but there need to be many variables in order for this money-making opportunity to become profitable and worth investing in.
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.
Is service revenue an asset or liability?
Service revenue may be an asset for your business, depending on its stage in life. New companies should use it to help them grow and establish themselves as leaders within their industry. On the other hand, mature businesses can put this money toward building reserves that'll protect company value if managers aren't able to secure capital from elsewhere.
You can use a simple calculation to determine how much revenue your business made from each of its services or product sales. The first step is figuring out total annualized operating expenses, including wages and benefits for staff members.
Service Revenue FAQs
Service revenue is what type of account?
Service revenue is an account that is used to reflect the net amount of revenue earned from providing services. A service provider can be a company, individual, nonprofit organization, government agency, etc. Companies need to have this account because it helps them plan how much they need in order to provide their services and stay profitable.
Is service revenue a permanent account?
Service revenue is an account that is used to record the total amount of money received from providing services and is typically considered an operating expense, not a permanent account. However, the classification of service revenue depends on an entity's business model; it may be classified as either operating or non-operating revenue depending on how it are generated and the nature of its use in operations.
Is service revenue a debit or a credit?
Service revenue is usually classified as either debit or credit, depending on how it's recorded. The most common type of service revenue is revenue received in advance for future services to be performed. When this occurs, it's typically recorded as a credit to the income statement and an asset account called deferred expenses.
On the other hand, when these types of revenues are billed after work has been completed, they are usually recorded as a debit to the income statement.
Is service revenue on a balance sheet?
Absolutely. Service revenue appears on a balance sheet as an accounts receivable for services rendered, which are also known as "accounts payable." This amount is typically listed separately from other accounts receivable because it's not considered cash. It can be found in the current assets section of a company's balance sheet or near the bottom of the liabilities column if service revenues are used to pay for expenses before they're billed.
Is service revenue a current asset?
Service revenue is a type of income that an organization earns from rendering a service. The accounting equation states that assets equal liabilities plus equity, so if the company's net asset figure is positive, it means they have more current assets than current liabilities. If the company has fewer current assets than current liabilities, this will affect its liquidity and solvency. Therefore, it should be included in total current assets and total current liabilities to determine how liquid an entity is.