Recurring Revenue
Posted 29 Jan, 2020
Author - Aderonke Adekunle
Investopedia defines recurring revenue as the portion of a company's revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.
Simply put, it is a stream of expected periodic sales. It is very important that businesses maintain a constant and consistent stream of revenue.
For example, company XYZ provides an automobile maintains and repairs service, and its customers signs a 2 years contract with the company. For that period, company XYZ expects the revenue from these contracts to come at regular intervals as agreed by both parties. Also, a company that gives loan subject to repayment expects a certain amount of money to be paid back, weekly, monthly or quarterly or as agreed by both parties, for the duration of the loan repayment.
  • Certainty: Recurring revenue makes a company more stable and predictable both operationally and financially. This in turn lowers the risk associated with a company's operations.
  • Predictable Cashflow: It gives predictability to the cash flow of your business, making your business more sustainable in the long run. Having a more predictable cash flow helps you also to make better and more long-term decisions.
  • Budget Forecast: It aids in forecasting revenue in advance thereby creating budgets with a higher degree of certainty.
  • Liquidation: A business with recurring revenue is easier to sell or exit as such businesses are appealing to buyers.
  • Increase the potential for collaboration: Companies using the recurring revenue model have greater interaction with their clients as they deliver value on a monthly basis. This enables them to keep their clients happy and involved.
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