How To List A Lump Sum On Financials

So I received this question a while back when I was talking about how important it is to know your numbers (spoiler alert, it’s REALLY important!). I was sharing a bit about my P&L Line items and how I plan for my expenses and profit annually, then quarterly, then monthly and someone asked how they should list a lump sum payment on their financial statements. 

First and foremost, I am not a financial professional, so do your research and talk to someone who is (as always!) Now that that’s out of the way, let’s get into this. And honestly it’s an easy answer in terms of how I handle it in my business. 

So let’s look at it like this: if a client pays you a lump sum in one month, it shouldn’t wreck your monthly average revenue. It actually shouldn’t matter at all (aside from the fact that you got paid 🤑). Let’s say we’re in April, the fourth month of the year, and you've had two clients pay you in full that were $10K each, but one paid you in January and one paid you in March. Your average monthly revenue for the year is actually $5K.  Now, it wasn't actually $5K on paper, but that's your average. 

See what I mean when I say being paid a lump sum doesn’t really matter? I’m not saying you aren’t getting paid, and I’m not saying that getting paid doesn’t matter. I’m saying that when it comes to your finances, getting a lump sum won’t ruin everything or make things more confusing, it’ll just alter your monthly average revenue. 

Now, I’m going to hit you with a little gem about this as well. From a financial system standpoint, you actually should still treat that lump sum as monthly recurring revenue even when they paid in full. It depends on the length of the engagement or the contract, but let's say this is a five-month contract and they paid you $10K. 

You should actually be treating that as $2K per month. You shouldn’t be spending all $10K in one month, because if you have a termination clause in your contract that says you can terminate at any time and given that termination, the client will be refunded then you’d have to give all that money back, regardless of whether you spent it or not, which could leave your up a creek without a paddle.

My best practice is to treat any lump sum or pay-in-full like a payment plan. Take the full amount, divide it by the length of the contract/program and then take that number to see what amount from that payment you can use monthly. 

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