The Income Statement, the Sales Events.

Originally Posted 6/8/2010 


At the top of P&L tower we find sales. This is the starting point for each and every analysis. Then you subtract the costs and get the margin, right? Wrong. What about the other sales events?

Better, what are sales event? There are four main sales events, orders, returns , complimentary offers and giveaways.

The orders, or better, all the documents that start from quotations to invoices are the main event, these provide the actual revenues and are quite commonplace. I'm sure you already know many ways to implement them in a datamart. I'm not going to teach you how to work with them.

Returns are technically related to orders or invoices, as they're often implemented like an invoice or shipment with negative quantities and values. They're also a cost because there's no profit associated with them and money will likely be returned to the purchaser. Processing returns is also an extra cost, unforeseen at the beginning. What's the correct value for returns? What does managers expect on that figure? 
The simplest way to calculate returns value is just getting the associated document values. It is a direct subtraction from revenues, so it perfectly makes sense. A more sophisticated approach might include the related returns handling and freight costs, if they can be identified. They're direct costs but, if lumped together with the equivalent costs for orders, may cause indicators and averages to drift.
A totally different game is about, which returns should be included in the P&L and which shouldn't. A return caused by product defects should not weight on the sales manager shoulders. A return caused by a mistaken shipment should be accounted to whom made the mistake. The P&L for the general manager should include all the returns. As you can easily imagine the same responsibility principle seen in previous posts apply here. Depending on who consumes the data, the model must be different.

Complimentary offers are indeed a sales event, usually they produce orders whose lines are zeroed or the sum is discounted by 100%. They must be subtracted because they're a cost directly applied to the customer which is presented with something free. The point is: what value should I place there? If you have, somewhere on the originating document, the price value of the free item, the temptation to use it is irresistible. Unluckily, it's almost always wrong. These are not lost sales to be subtracted from the total amount, these are costs (or investments?) incurred to "please" the customer, help it selling your stuff better or any other promotional purpose. Likely, there was no chance to sell these items in the first place, they are not "fake" sales. So the right way to give a value to complimentary offers is at cost. That is, the cost of having those orders through the door must be compensated by actual sales.

Giveaways may look like the same as above, but they're not. They're something that you give away because the customer already purchased something else. While they still can be considered as a sort of investment to keep the customer happy, they are sales intentionally missed. That's why they can be set at price value. This schema is not universal and depends heavily on the specific market. The key concepts of responsibility, cost and price valuations, freebies to make sales and freebies because of sales made, though, can be applied in every market. There are some other minor events that should be taken in consideration: financial credit notes and, very rare, other financial documents. These two occur when there's a money exchange not related directly with an exchange of goods and services. They cover various events and, sometimes, their amount is proportionally high enough to be taken into consideration in the P&L. Like for returns, the reason why the note has been issued guides the model implementation.

This is it for now. See you at the next post of the Business Analysis storyline.

photo courtesy wadem