Search
  • Pro-Forma

Modeling Revenue Streams

The model allows for two types of revenue streams: recurring and one-time.


The pricing and cost for one-time offerings are based on each unit sale. The sales forecast represents the number of sales for that offering.


The pricing and cost assumptions for recurring offerings are on set a monthly basis. The sales forecast represents only the number of new customers each month. To see the total number of customers for that offering in a given month (including recurring customers from previous months), go to the Offering tab for that offering.


If you have an offering that is recurring but priced annually or quarterly, specify that in the dropdown that says, "Enter the Length of Relationship in Months." Then enter the monthly equivalent of the associated price and costs.


The model is set up this way to properly account for deferred revenue. GAAP accrual accounting standards require that recurring revenue streams are deferred. This means that if you bill quarterly or annually for a service, that revenue is spread out throughout the quarter or year as you "earn it." Your Cash Flow Statement will show the cash that you collect when you bill the customer, but the Income Statement will spread out the incoming revenue over the term of the service. While this can seem confusing and unintuitive, it is proper accounting methodology. The model will handle this properly as long as you enter your price and COGS/COS as a monthly value.


Many business models have a one-time initial purchase (such as a setup fee or a device or hardware purchase) and a recurring revenue fee (such as a maintenance fee, license fee, or subscription fee) for the same customer. The Pro-Forma Model captures both types of revenue assumptions by allowing you to create two separate offerings and link them together, enter different assumptions on billing and collection for each as appropriate, and indicate that both offerings are for the same customer so that your customer count is accurate.


Let's take an example scenario to show you how easy this is to model with very few inputs, but that will give you a very detailed financial model with the cash implications:


One-time device sale/setup of $350 paid in advance with sales starting at 100 new customers in month 2 of the plan.


Recurring monthly license/support subscription of $149.99 that starts the month after installation and that is billed quarterly in advance on a 12-month contract, and anticipated to be collected in the first month of the quarter. The contract renewal rate is anticipated to be 60% of all customers at the end of each 12-month contract term.


To enter the assumptions, we will enter two different offerings for the same customer, one for the setup service or hardware and one for the subscription service with the same quantity added for each for each month. The good news is that we’ve made it really easy to model this by simply linking Offering #2 to Offering #1, so you don’t have to re-enter the customer acquisition expenses or sales forecast assumptions.


Here’s how the entries and output will work:


Offering #1 – One-Time Setup and Device Sale Inputs

The Type and Length of Sale entries will look like this:


The Pricing and Revenue Share entries will look like this:


And the Sales forecast output will look like this (after using our handy Auto-Fill feature to fill in your 60 month forecast with only a few clicks):


If you look at the Offering tab for this offering, you can see the results as follows in terms of the sales detail, with sales starting in the 2rd month of the plan (showing you the first several months - we have expanded to the monthly view here):


As well as the Revenue detail in terms of Cash, Deferred Revenue, and Receivables:


Offering #2 - Recurring Quarterly License Fee Inputs

The Type and Length of Sale entries will look like this:


The Pricing and Revenue Share entries will look like this (note the Quarterly billing):


And the Sales forecast entries will look like this as we link the forecast to Offering #1, the One-Time Setup and Device Sale with a one month lag (note that only four simple entries populate the entire forecast:



Once we save and calculate those entries, we can see the details in the Sales report on sales...


...and Revenue, Cash, Deferred Revenue, and Receivables:


Because both offerings are to the same customers, we then remove the duplicate customer count...


...and all reports from Income Statement, to Cash Flow to Balance Sheet to Key Metrics is automatically calculated to shows hundreds of pages of detail. This is an example of the Key Metrics report showing both offerings consolidated with the 100 Subscribers:


Can't find an answer? Contact us and we'll get back to you!