Part 10 of 19 in Understanding Financial Statements: What the numbers really mean, and why they matter← Part 9Part 11 →
Most Indian startup founders boast about their revenue. But here’s the harsh truth: not all “revenue” is created equal. You might be booking sales, not earnings. And that could be setting you up for failure.
Understanding Revenue: More Than Just Sales
Let’s cut to the chase — revenue isn’t just about sales. It’s about true earnings. Many Indian startups blur this line. They count cash in as revenue, but that’s a mirage.
1. Booking Dispatch, Not Acceptance
In B2B supplies and exports, booking revenue at dispatch is common. But if returns are frequent, this approach is costly. Remember, cash isn’t king if it’s bound to return.
2. Gross Merchandise Value (GMV) Illusion
Marketplaces and D2C businesses love flaunting GMV. But GMV isn’t your revenue. It’s the sticker price. Your earnings are the commission or net sale after returns. Let’s be real — don’t count what you don’t keep.
3. Annual Plans Booked on Day One
Edtech and SaaS often book the entire annual plan upfront. Sure, the cash arrives, but the service is delivered over time. Recognize it monthly. Otherwise, you’re inflating your success today and setting up tomorrow’s fall.
4. Related Party Sales
Sales to a promoter’s firm or a friendly distributor can be real or just a mirror. The danger? It’s easy to count these as revenue when they might just be a facade.
5. Booking the Cycle Too Early
In sectors like IVF, recognizing revenue upfront can be deceptive. Not every registration means revenue. Be honest about cancellations and refunds. Your revenue should reflect reality, not optimism.
The Deferred Revenue Advantage
Deferred revenue is not a liability to hide. It’s a promise. If you’re an edtech founder selling annual plans, spread the recognition over the year. It reflects true performance and builds investor trust.
Deferred revenue isn’t a shame. It’s a promise to deliver value, and a sign of future potential.
Why Investors Appreciate Deferred Revenue
Investors value transparency. Deferred revenue indicates sustainable income. It shows you’re not cannibalizing future growth for present glory.
Discounts and the Month-End Illusion
Discounts and credit notes can inflate your revenue numbers. A sales head meeting a target with last-minute discounts is fooling no one. Such tactics might meet short-term goals but will break trust in the long run.
Spotting the Pattern
Look at monthly credit notes as a percentage of revenue. Spikes after quarter-end aren’t seasonal. They’re a sign of artificial inflation.
The Bottom Line
Revenue isn’t just about sales. It’s about what you truly earn. Separate the two and focus on building a sustainable business. Investors aren’t looking for inflated numbers; they’re looking for honesty and potential.
FAQs
Why should I care about deferred revenue?
Deferred revenue reflects what you owe your customers. It’s a liability but also a sign of future earnings. Investors prefer a clear picture of your financial health.
Is booking GMV as revenue a bad practice?
Yes, because GMV isn’t what you earn. It gives a false sense of scale. Focus on net earnings — that’s what truly matters.
How can I ensure accurate revenue reporting?
Recognize revenue as you deliver value. Avoid booking everything upfront. Regular audits and a transparent accounting system help maintain accuracy.
If you want honest guidance on building a sustainable Indian startup, reach out to Malpani Ventures. We’re here to mentor founders who are ready for real success.