After a month of hectic travel, strategic roll out of marketing schemes aimed at creating newer customer segments, pampering clients with offers, going hoarse doing sales pitches, and spending late nights ensuring that all the sales administration processes were ticked off, the sales manager of an automotive dealer was shocked when his numbers fell short of the numbers reported by the finance team. He walked into the financial controller’s cabin seeking an explanation.

“There are three steps between sales and revenue,” said the financial controller. However, the sales manager retorted, without allowing him to complete, “Wow, three more steps after invoicing, client acceptance and lorry receipts?” He was about to ask why not wait till cash is paid, but realised it was a risky proposition to offer.

The financial controller calmly replied, “Give me five minutes, and I will solve the mystery for you”. Not a bad bargain, the sales manager thought.

The financial controller began, “You need to answer three questions: What have you sold? We call it the unit of accounting by the way? At what price have you sold? We call it the measurement of revenue. What more do you have to do? We call it the continuing obligation, and that influences when we release the sales to revenue.”

The sales manager sat speechless and, for once, got a taste of what customers must experience when they grapple with the ‘conditions apply’ element that is marked by an asterisk.

The financial controller continued, “Let’s take an example. You guys are constantly innovating and creating newer experiences for our customers. You want to do more, provide solutions, and package all your customers’ worries in a deal. So, when you offered your customer things like insurance, interest free credit, extended warranties, and free roadside assistance, you have offered him more than a car. It is therefore imperative for us to understand what you have sold. We try and do this by considering this transaction from the buyer’s perspective as well.”

The sales manager was now all attention. The financial controller went on, “The customer sees value in everything he gets. He has a price point for each of those services he gets from the dealer — he adds them up and evaluates the total bargain received. Now, you know that each of the items that you packaged is an SBU (strategic business unit), and we need to fairly allocate this discount to each of them. To be fair, we do this in the ratio of the listed price of each of the services. That brings us to the amount we can consider as fair allocation of the sales price for each of the elements you sold. This determines who gets what — and we call it the measurement.”

At this point, the financial controller took a breather to get a sense check. After confirming that all was well, he continued, “Now, each of this would be earned over different periods, and cannot be considered as earned on the date of invoice. Though you delivered the car today, the interest would be earned over the period of time, and the maintenance would be provided over next few years. So, I guess you will have some sympathy for the challenges we face in trying to track your single invoice into these different elements, and over such a long period of time.”

The sales manager sensed a change in the other’s tone — from defensive to that of ‘we don’t get any respect for our efforts’. He quickly got up and said, “Now I understand. This makes sense, and thanks for sharing this detailed explanation. I also appreciate your efforts taken to follow this process”.

“Accounting and financial reporting is aimed at reflecting the substance of the transaction, you see — and that’s our job,” the financial controller said in conclusion, as he walked the sales manager to the cabin door.

(Sunder Iyer is Partner, Price Waterhouse)

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