How do you deal with refunds? Let's say a customer buys a product, for whatever reason their expectation not met, and a refund is issued. Do you adjust revenue in the month the revenue was recognized? Or do you add negative revenue to the month in which the revenue was received? Or something else?
And for average monthly growth rate, that can vary a lot for the same company depending on where you start. If a company has monthly revenues of 1, 6, 10, 12, 14, 15, 16, it has an average growth rate of 58% over the past 6 months, but 10% over the past three months (and 7% over the past month). I see startups using arbitrary start dates to inflate average growth rates, and am wondering if there's something standard when presenting this metric.
1) For a business with consistent refunds in prior months (e.g. money back guarantee), this has the odd effect of always being able to show growth compared to previous months, even if revenue is constant.
2) Right, that's how I calculated 58%, but does it really make sense to calculate the base off of some arbitrarily low first-month revenue? Does it make sense that a company with strong first month sales should have a much lower growth rate than a company with abysmal first-month sales, given a certain current monthly revenue?
1) If you expect a certain refund quota, lets say 20 % within 6 months, then you should already account for it: only account 80 % of the actual revenue and adjust this number after 6 months when you now the actual refund quota. This makes it more complicated but it would be the right thing to do and will help you get a somewhat decent financial plan.
2.) If your growth curve flattens out than this approach obviously does not really give you a good representation of how well you are currently doing.
Comments
Two questions:
How do you deal with refunds? Let's say a customer buys a product, for whatever reason their expectation not met, and a refund is issued. Do you adjust revenue in the month the revenue was recognized? Or do you add negative revenue to the month in which the revenue was received? Or something else?
And for average monthly growth rate, that can vary a lot for the same company depending on where you start. If a company has monthly revenues of 1, 6, 10, 12, 14, 15, 16, it has an average growth rate of 58% over the past 6 months, but 10% over the past three months (and 7% over the past month). I see startups using arbitrary start dates to inflate average growth rates, and am wondering if there's something standard when presenting this metric.
1.) Refund: Yes, I would adjust the revenue in the month it was recognized.
2.) Monthly growth: It is actually really simple, you just caculate:
(16/1)to the power of (1/6) which equals: 1.58 This means the average growth rate was 58 %.
16/1 is the total growth rate for all 6 months. And to the power of (1/6) because it is calculated among 6 months
1) For a business with consistent refunds in prior months (e.g. money back guarantee), this has the odd effect of always being able to show growth compared to previous months, even if revenue is constant.
2) Right, that's how I calculated 58%, but does it really make sense to calculate the base off of some arbitrarily low first-month revenue? Does it make sense that a company with strong first month sales should have a much lower growth rate than a company with abysmal first-month sales, given a certain current monthly revenue?
1) If you expect a certain refund quota, lets say 20 % within 6 months, then you should already account for it: only account 80 % of the actual revenue and adjust this number after 6 months when you now the actual refund quota. This makes it more complicated but it would be the right thing to do and will help you get a somewhat decent financial plan.
2.) If your growth curve flattens out than this approach obviously does not really give you a good representation of how well you are currently doing.