When I first entered the domain industry as head of finance and operations at .MOBI, the company had just acquired its licence from ICANN. I did a quick overview of the business environment through a financial lens.

My first impressions were predominantly positive. Sales were generated up front on a cash basis, which put registry operators in an enviable operational cash flow position. Also, there were no accounts receivable concerns due to the top-up nature of funding by registrars. Outsourcing the back-end registry operations meant that we could tie cost of goods sold (COGS) to activity.

But I had a steep learning curve before grasping the minutia of recognizing deferred revenue. Also, there was foreign exchange risk exposure because business operations were partly in the Euro zone while the domain business, like oil, was traded in U.S. dollars.

However, there are more subtle nuances that need to be grasped by the new entrant financial professionals. If they are to provide effective financial leadership to the business and support the management team, they’ll need quality information for decision making in six key areas. I’ll discuss three of them today and the other three in a subsequent post.

Cash Sales & Accounting Sales

While sales and COGS are generated on a cash invoiced basis, it’s vital that the finance professional understand how to recognize the revenue/cost over the life of the domain term. Accounting rules can be complex. Dealing with multiple registrars and domain terms, not to mention numerous price points, will require time and patience for the new TLD financial leader to master. Simple excel spreadsheets won’t do it if you want to have accurate budgets/forecasts—and that’s before the added complexity of renewals kicks in.

Periodic Reporting on a Dual Basis

From the outset, management reports should be presented on a cash sales and accounting revenue basis. Accounting revenue basis is initially more conservative as revenue is recognised over the life of the domains and not in the month invoiced. However, note the dangers of only reporting under accounting revenue basis. Table 1 illustrates the cash sales vs. accounting sales of a sample TLD launched in Jan 2011.

Table 1 – Cash sales vs. accounting sales of a sample Top-Level Domain (TLD) launched in Jan 2011. (Click to Enlarge)

Cash sales dwarf accounting sales during the Sunrise, Landrush and early General Registration phases. However, as the business becomes more run rate, accounting sales exceed cash sales due to the “slow burner” effect of recognizing revenue of the Sunrise & Landrush periods over the domain’s life. For example, reporting only on an accounting basis in December 2011 might give a distorted view of business performance for the month.

Promotions

Implementing sales promotion campaigns is a key way of increasing domain sales volumes, especially after the initial high volume launch activity passes. A good sales and marketing manager will put pressure on the management team to run regular promotions. It’s vital that the finance team measure the success of each campaign and understand which tactics work and which don’t. Otherwise, you could be throwing money away. The finance team must take a hands-on role in designing the numerical aspect to the promotion and rigorously perform post-event analysis for management. Your back-end registry provider will report volumes, but this will need to be supplemented by strong business intelligence reporting by finance.

In my next post, I’ll discuss why finance departments must have a hands-on role in a TLD launch, forecasting renewal projections and foreign exchange risk management.