Revenue Streams Meaning
Revenue streams are various sources of income from which the organization earns revenue by selling goods or providing services or combination of both and such revneues can be recurring in nature, transaction-based, project-based or combination of various types depending on the kind of business in which an organization is operating.
Components
Depending on nature, such revenues can be recurring or non-recurring –
#1 – Recurring Revenue
The recurring revenueRecurring RevenueRecurring Revenue is a part of the Company’s total revenue or income constantly generated in the future at regular intervals (monthly or yearly). This type of revenue is relatively stable as you can predict its occurrence with reasonable confidence. read more is a source of income, which is ongoing, and the recurring revenue model is the one which most organization aspire to set up as this is predictable and healthy input for working capital requirements. For example – an organization operating in automobile sectors, the after-sales services are recurring in nature and forms a major source of income. A company is providing broadband services, or for a cellular company, the monthly subscription fee is recurring in nature. The recently started online website Netflix, the monthly subscription of their customers are recurring in nature.
#2 – Non-Recurring Revenue
It is the source of income, which is occasional in nature and cannot be predicted easily. For example – a company providing video services will have more subscribers than usual when there is Wimbledon or Football world cup is going on. Similarly, a company providing data cellular services might find users making more calls during Christmas and new year.
Top 6 Types of Revenue Streams
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Source: Revenue Streams (wallstreetmojo.com)
#1 – Services
The income received from providing services falls under Service revenue. So, for example, the government earns revenue by providing transportation services in any country is revenue from providing services. Also, consulting provided, audit fees, and various other professional fees are services in nature.
#2 – Project Revenue
Some companies earn revenue by taking up a project with a new or existing customer. For example – deployment of metro services in a city, building roads & flyovers, etc. These kinds of projects are assigned to one or a few after reviewing applications from many parties.
#3 – Leasing
It is a concept where the owner called lessor of a property, which could be Land, Building, Machinery, and other assets, allows another person called lesseeLesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. read more to use its assets. The lessor charges rent or interest depending on the type of asset, and this is revenue for the lessor. The lease can be Operating leaseOperating LeaseAn operating lease is a type of lease that allows one party (the lessee), to use an asset held by another party (the lessor) in exchange for rental payments that are less than the asset's economic rights for a particular period and without transferring any ownership rights at the end of the lease term.read more or financing lease depending on the nature of the contract.
#4 – Based on Transactions
Revenue earned from sale proceeds, which are usually one-time customer payments, is termed as revenue based on transactions. For example – the pizza outlets or McDonald’s earn their revenue by selling it directly to the customers, which are usually non-recurringNon-recurringNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more in nature.
#5 – Copyrights & Licensing
With the increase in the use of computers and globalization, copyrights and licensing have become a major source of income for companies who have the license. For example – Every time we buy a computer or a laptop, we also have to buy Microsoft license to use Microsoft office products like word, excel, PowerPoint, Skype, etc. Microsoft does not sell the product but only grants the license to use for a limited period and takes the payment. It is revenue from licensing.
#6 – Others
There are other types of revenue streams as well from which the organization or a person makes income. Brokerage firms, lending assets, advertisements, debt collection services, intermediary payments, etc. are an example of various other modes of a source of income. Also, with the increasing digitization and mobile payments, visa and master card earn their revenue by working as the link between the parties making and receiving payments.
Revenue Streams Example
Let us consider that X Ltd., which is in the business of providing cellular services, has revenue of $5 Million. When we look at the financial report of the company, we find that monthly recurring revenue is $4.5 Million, which is the subscription fee from the old customers of last year, and new customers added this year. So, every month the user pays the charges, which are recurring revenue for X Ltd. There is also non-recurring revenue of $0.4 million, which is from providing new sim cards and replacement of old ones. Then there is $0.1 million from occasional extra usage of the customers. The point here is that every organization has various Revenue streams by nature.
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Source: Revenue Streams (wallstreetmojo.com)
Advantages
- A steady stream of revenue Improves the goodwillThe GoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more and integrity of the organization in the market in the long run
- Important for applying for loans as revenue plays an important factor
- Important for maintaining steady working capital managementWorking Capital ManagementWorking Capital Management refers to the management of the capital that the company requires for financing its daily business operations. It is important for the company in order to maximize its operational efficiency, manage its short term liabilities and assets properly, avoiding the underutilization of the resources and avoiding the overtrading, etc.read more
- Revenue is the measurement of success of the organization, as they say that it is a billion-dollar company, it means the annual revenue is over $1 Billion
- Helps in payment of dues and employees on time
- Extra cash generated from revenue could be used for capital investmentsCapital InvestmentsCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more
Disadvantages
- It is a tough task to maintain steady revenue streams and customers over a longer period of time
- Sometimes a slight decrease in revenue percentage plays a big role in the stock prices of an organization
Points to Note
Nowadays, with the development of the accounting system, it is easy and quick to prepare the books of accounts as all the departments are interlinked through ERPERPThe full form of ERP stands for Enterprise Resource Planning. ERP is a process to integrate the basic processes such as Finance, HR, Manufacturing, Supply Chain in one single integrated system. ERP is a system that helps organizations to smoothly run their operations by integrating the basic operations systematically.read more – Enterprise Resource Planning systems, which make it easier to analyze the data.
An organization must always monitor and analyze the revenue streams closely. A decrease could suggest a big customer leaving or extra credit issue or any issue in the billing system. Likewise, the increase in revenue could be a result of a recent takeover or a new customer or increase in business from an existing customer.
Conclusion
Revenue is the blood of the business, which brings money, which circulates through all the departments and ensures that the organization keeps on functioning. Revenue streams are so important that companies become bankrupt when they are dried up. That is why an organization must always put the best resources for collection, billing, sales, and other support team dealing with them.
Recommended Articles
This article has been a guide to what is revenue streams and its meaning. Here we discuss the top types of revenue streams, including services, project revenue, leasing, transaction-based, copyright, etc., along with an example to understand it better. You can more about financing from the following articles –
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