13 - Sales and utilization Flashcards
What has a critical impact on the overall profitability of a service provider?
The level of revenue in any week or month
Why is revenue recognition in a service business complicated?
It is subjective and open to abuse or manipulation
What are the three types of service income streams for XYZ Co?
- Large contracts with multiple phases
- Small contracts
- Fixed-term service, support, and maintenance contracts
When might you consider a sale is made for large contracts?
Options D (when the first month’s work is completed) and E (when the first month’s work is signed off by the customer) are widely accepted
What must XYZ Co do if a lower than planned profit or loss is likely?
It must reduce the profit it books accordingly
What is the importance of time sheets in revenue recognition?
They help allocate hours to specific customer contracts for gross revenue recognition
What is a common method for recognizing revenue from fixed-price contracts?
Dividing the contract price by the number of months covered and taking the same amount to income each month
What is the purpose of a sales pipeline?
To measure the visibility of revenue and track sales in advance of booking revenue
What elements are commonly included in a sales schedule?
- Actual sales
- Projected sales
- Categories of sales (confirmed, bid for, identified opportunities)
What does Category 1 in a sales pipeline typically represent?
Actual confirmed sales
How is the pipeline summarized from the sales schedule?
It includes total sales from Category 1, weighted totals from Category 2, and ignores Category 3 if too uncertain
What does a pipeline of 4.6 months indicate if the sales cycle is one month?
It is excellent
What is a potential risk if the sales pipeline is decreasing?
Urgent attention is needed to generate more contract opportunities
What issue do service providers face when focusing on delivery of large projects?
They may neglect the sales pipeline, leading to a ‘feast and famine’ situation
What is one challenge faced by smaller service providers in maintaining a sales pipeline?
Key executives are often involved in both sales and delivery
Fill in the blank: The revenue recognition practices depend on the _______ with which a company controls its contracts.
[rigour]
True or False: Revenue should be recognized at the point when all work is completed.
False
What must be assessed to determine revenue recognition when a contract is not on track?
The progress of the contract against the time charged in
What happens when management influences revenue recognition to meet targets?
It can lead to revenue smoothing, which is difficult to correct
What is the risk of recognizing income too early?
There may not be billable capacity left to recognize future income
In fixed-term contracts, what is the customer essentially purchasing?
An insurance policy against the number of service calls
What is a significant risk when moving into a new line of service for XYZ Co?
There is less experience in making judgment calls on revenue recognition
What does a decrease in the sales pipeline typically indicate?
A potential problem in winning new contracts
What is a key challenge for smaller service providers in sales?
Sales effort often headed up by founders/key executives involved in both sales and delivery
This dual role can hinder the ability to focus on winning new work.
