Using accounting terms in contracts

I recently came across a situation where we used “net revenue” in a bonus plan as part of the calculation to determine what the bonus pool would be.

In other contracts, we’ve used “net revenue” to distinguish from “revenue” (aka gross revenue) to deduct things like discounts, credits, returns, and so on. In many of these cases, clients prefer to use cash accounting rather than accrual accounting so they’re not paying quarterly bonuses or commissions on cash that hasn’t been received.

But recently, someone questioned whether “net revenue” really meant (Revenue – COGS), which I would normally call Gross Income. And then we started heading down the GAAP rabbit hole. Conveniently, there’s evidently no actual GAAP definition of “net revenue,” so that’s good. On the other hand, it just signals that there’s too often confusion about casual use of terms of art that we both do and do not want to treat that way. So I proposed that we use the following scheme for referring to these line items in our contracts, and I’ll do the same myself from now on.

Revenue (use Gross Revenue or Net Revenue if necessary to avoid confusion)
= Gross Income
– SG&A
= Operating Income or EBITDA
– Interest
– Taxes
– Depreciation
– Amortization
= Net Income

As a side note, I’ll restrict the use of the word “margin” to describing ratio of any of these other lines, usually the three income lines, as a percentage of revenue. That’s helpfully unambiguous.

Leave a Comment