Revenue as Professional Services KPI
Definition, Calculation, Example

Why is revenue important? What is revenue recognition? How is revenue calculated and measured?
Revenue is the money brought into the organization that comes from sales. In professional services, not having a 100% prepaid contract is fairly common. Conditions, scope, budget, and timing of a project might change, which affects the revenue from the particular client.

Therefore, revenue is what a company thinks it has earned on a project, which might differ from the amount received.

That is why many organizations don't use Cash Accounting (in that case, revenue refers to every payment collected) but Accrual Accounting, in which everything depends on the revenue recognition practice of a company.
Revenue provides financial feedback for the whole consulting firm. Year over year (YOY) revenue growth evaluates a company's financial performance. During the history of an organization, revenue change shows the actual growth of the business.
Different companies apply different revenue recognition practices; some record revenue after the contract is signed, another records after services have been delivered or when payment is accepted.

In case of a fixed price fee per project after delivery, the general formula for revenue recognition is as follows:
$$ Revenue\;=\;Project\; A\; sales\; [\$] \; +\; Project\; B\; sales\; [\$] $$
Often agencies recognize revenue according to the work completed within a long-term project. In that case, the formula for revenue recognition is thus:
$$ Revenue\; =\; Total\; Project\; Cost\; [\$]\; ×\; Perecent\; of\; complition\; [\%] $$
Here is the formula to calculate the revenue of the agency with the establishment of a time and material (T&M) contract:
$$ Revenue\; (T\& M)\; =\; Hours\; ×\; Hourly\; Rate\; +\; Cost\; of\; meterials $$
A formula for a retainer fee is as follows:
$$ Revenue\; (retainer)\; =\; Number\; of\; months\; ×\; Monthly\; retainer\; fee\; [\$] $$

Fixed price projects revenue recognition calculation example

In Q1, the agency sold project A for $50,000, project B for $80,000, and project C for $90,000. The agency held negotiations about project D for $40,000 and project F for $60,000 and did not sell them yet.
Revenue of the Agency in Q1 is $220,000 for these 3 projects.
$$ Revenue\; =\; \$50,000\; +\; \$80,000\; +\; \$90,000\; =\; \$220,000 $$
Another agency sold a long-term project for $250,000 but completed only 30% of it. The recognised revenue is $75,000.
$$ Revenue\; =\; \$250,000\; ×\; 30\%\; =\; \$75,000 $$

Time and material revenue recognition calculation example

The agency delivered project A. It took 190 hours and third-party printing services. The agency decided to resell the printed materials to a client for $1,000. The agency's hourly rate is $75.
The revenue of the agency is $15,250.
$$ Revenue\; =\; 190\; ×\; \$75\; +\; \$1,000\; =\; \$15,250 $$

Retainer fee revenue recognition calculation example

The agency sold its services with a monthly retainer fee of $1,200 with a 6-month agreement.
Agency revenue will be $7,200.
$$ Revenue\; =\; \$1,200\; ×\; 6\; =\; \$7,200 $$
Depending on the company preferences and the type of the contract, revenue could be collected through a Customer Relationship Management System (CRM) like Salesforce, a time tracking system like Harvest, bookkeeping and invoicing systems like Quickbooks, or as tracked in a spreadsheet.

Measurements of revenue can provide answers to questions such as the following:
  • How much money did we make this month compared to previous years?
  • Which office brought in more money this year?
  • What is the revenue per consultant?
  • Which consultancy role brings the most revenue automatically collects revenue from various systems and shows it with detailed segmentation over a period of time.
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