Calculating service requests is more than just a metric for business as it offers a magnified view of the business’s financial health. Without any idea of revenue generation, you know how difficult it would be to make strategic business decisions.
Of course, this is true for service-based businesses, where service revenue serves as the backbone to help assess financial performance.
Unlike other companies, which earn from product and service sales, service-oriented businesses rely solely on service revenue as their only income source. Therefore, they need a completely different strategy than the product-based businesses.
In this detailed guide, we will understand what service revenue is in accounting. So, let’s begin.
What is Service Revenue?
Service revenue is a company’s net income generated by providing services as per customer’s request. Whatever amount is incurred after completing the service goes directly to the accrual accounting records until you get paid.
Since it’s a service revenue, income earned through product deliveries or interest is excluded. Hence, the revenue generated through intangible deliverables is considered service revenue.
An HVAC business, for example, sells air conditioners and heaters to generate revenue. Besides, they also offer HVAC services in their locality to earn extra income.
The revenue earned from their service work is considered service revenue, whereas the revenue from selling tangible products, such as cooling or heating equipment, is not.
Types of Service Revenues
Service revenue is the result of different service types that are endless. But, let’s throw light on some major types of service revenues to know when running a service-based business.
1. Maintenance service
The cost incurred for maintenance of equipment, machinery, or infrastructure to ensure smooth operation. They are precautionary measures to avoid breakdowns.
2. Digital Marketing Service
Online marketing services like PPC advertising, SEO, and content marketing collectively contribute to the service revenue.
3. Legal Services
Legal practitioners making revenue by offering consultations, contract drafting, or court representation is also a part of service revenue.
4. Event-based Services
Businesses generating revenue by arranging wedding parties, concerts, and corporate conferences are deemed as service revenue.
5. Education Service
Education firms minting revenue from services like online classes and certification training falls under service revenue.
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Importance of Service Revenue for Businesses
Below are a few reasons why service revenue plays a key role in helping you run a profitable business.
1. Reliable Income Source
It serves as the primary source of income for businesses offering services only. Service revenue provides them with a clear picture of their business’s financial health and accordingly, they can establish solid business strategies or adjust their pricing models.
2. Diversification
Businesses that rely on product sales can generate complementary income through services, allowing them to diversify and reduce dependence on a single revenue stream. Service revenue becomes more significant as businesses expand by offering service packages.
3. Foster Client Relationships
Service revenue comes from the tasks you perform to satisfy customers, which in turn strengthens client relationships. As a result, you can set up a loyal customer base and enhance your business’s credibility.
How to Calculate Service Revenue?
There are mainly three steps to figure out what’s your service revenue. Let’s understand in detail.
1. Know Your Revenue Stream
Firstly, you need to identify the revenue source based on the service you perform on a monthly or yearly basis. While service-oriented businesses have only one income source, businesses providing sales and services may take more time to find the right revenue source.
So, depending on your business type, you need to double down the revenue stream before you start gathering the sales data. In this process, ask yourself how many services you performed, how much is the net income and what are customers’ demands.
2. Retrieve Financial Data
In the next step, retrieve your sales data by using automation software like Moon Invoice. When you use the automation tools, it centralizes your sales data. This means you can retrieve the data in a single click rather than conducting a manual search. Make sure you maintain accuracy while collecting important financial data to figure out the service revenue.
Don’t forget to consider deferred revenue, the money you received upfront but haven’t completed the service. As soon as you are done with collecting the financial data, proceed with the calculation.
3. Determine Service Revenue
Now you have all the information in hand, so let’s start calculating the service revenue by using the given formula.
Service Revenue Formula:
Number of Completed Services X Average Price of Services = Service Revenue (in Percentage)
For example, you are a freelance web developer who earns service revenue by offering website development services. In a month, you completed 7 projects, costing $300 for each service, then $2100 is what would be the resulting amount ($7 X $300). This is how you calculate the service revenue based on the past sales data.
How to Report Service Revenue on an Income Statement?
Once you generate the service revenue, your work isn’t completed until you report it on an income statement. The best thing you can do is utilize the automation tools or invoicing software to record the income statement.
Manual checkups and paper-based documents are highly prone to errors and consume more time. Therefore, it makes sense to hand over your financial reporting duties to software like Moon Invoice.
If you are already using it, then as a Moon Invoice user, you can retrieve the business data in one click and generate a financial report. Get accurate data and record the service revenue on the company’s income statement without doing an in-depth analysis.
This automated process will free you up from unnecessary workload and you can quickly submit an income statement to the tax authorities.
Is Service Revenue an Asset?
No, service revenue can’t be considered an asset. The reason is that service revenue neither has a physical form nor leads to financial gains. Service revenue is only income generated by completing services.
Assets represent accounts receivable (the money you are still owed from your customers) and the cash you have received. Hence, service revenue and assets are quite different from each other.
Service revenue indicates the company’s net income, while an asset is a company’s resource that contributes to its financial value. Service revenue is recorded on an income statement, whereas an asset appears on the balance sheet. That’s why service revenue isn’t an asset.
How to Grow Service Revenue?
Here are some great ways to consider when it comes to maximizing your service revenue.
1. Add More Services
Expanding your services can lead to higher revenue, allowing you to grow service revenue gradually. With more services, you can reach a wider audience as well.
2. Leverage Customer Retention
Focus on how to retain customers instead of finding new customers. This will bring the churn rate down and boost the customer retention rate.
3. Offer Long-term Contracts
Provide value-based pricing with seasonal discounts and also highlight cost savings compared to short-term services while preparing a new contract agreement.
4. Introduce Referral Programs
Launching a referral program can make a difference in generating service revenue. Ask customers to refer others who need your service and earn exclusive perks.
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Conclusion
In conclusion, you now have a clear understanding of what type of account service revenue is and how to calculate it. Service revenue is crucial for any business as it reflects the net income earned from providing services.
By analyzing this data, you gain in-depth insights into the company’s financial health, allowing you to make better decisions.
To maximize service revenue, you can implement the strategies mentioned above or use software like Moon Invoice.
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FAQs
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
