Revenue Streams Definition
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 revenues 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.
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 teams dealing with them.
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Revenue Streams Explained
A revenue streams in business model is the various source of income that an entity can create in order to run and sustain its operations in the market. A company can generate revenue from different sources depending on the type of business, the type of market it is operating on, the nature of customers, etc.
The idea is to diversify its income source which not only help in increasing the earnings but also reducing risk. If one income source does not work well, the loss can be compensated from another source.
Depending on the source of income, the tax structure also changes, which again depends on the rules and tax laws within the jurisdiction where the entity is operating. However, for the retail business, more diversification regarding revenue source is possible as compared to companies who are engaged in providing services to customers.
Depending on the source of income which may be an active or passive revenue streams the accounting method followed for recording transactions also change. If there are multiple fund sources, the accounting process may become complex and require more details. In such a situation, accuracy and transparency becomes very important in order to maintain trust and reduce friction within the business model.
The audit requirement also increases with diversification of revenue stream. The entity should take utmost care to gets its accounts audited which will ensure compliance with accounting policies and help stakeholders take decisions based on the financial health of the company.
Depending on nature, such revenue streams in business model 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. is a source of income, which is ongoing, and the recurring revenue model is the one which most organizations 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 the Football world cup going on. Similarly, a company providing data cellular services might find users making more calls during Christmas and new year.
#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. to use its assets. The lesser charges rent or interest depending on the type of assetType Of AssetAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets), 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. or financing leaseFinancing LeaseFinance lease simply refers to a method of providing finance in which the leasing company purchases the asset on behalf of the user and rents it to him for a set period of time. The leasing company is referred to as the lessor, and the user is referred to as the lessee. 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. in nature.
#5 – Copyrights & Licensing
With the increase in the use of computers and globalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations., 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 a 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 examples of various other modes of a source of income. Also, with the increasing digitization and mobile payments, visa and mastercard earn their revenue by working as the link between the parties making and receiving payments.
How To Create?
Here are some methods that help companies identify strategies and opportunities that lead to creation of different active or passive revenue streams.
- Market information– Every business should keep track of what is the market condition and where the company stands currently. If the products and services that the company is dealing with, has good demand and possibility of more innovation and expansion in the market, then there is every chance of new ideas to emerge.
- Company analysis – The management should do proper analysis of the strength, weakness, opportunity and threat of the business to understand the areas that could be further harnessed to increase revenue or add to the current sources of income.
- Brainstorming ideas – The employees and management should always remain open to new ideas that can come from proper observation of different problems within or outside the business or lack of methods to address those problems. The source of an idea is always a demand of something but lack of supply of a proper solution to it. Therefore, there should always be a flow of new ideas to encourage multiple revenue streams.
- Cost-benefit analysis– A cost-benefit analysis helps in understanding whether an idea can be put into action and if it will be feasible from the company cost and revenue point of view.
- Monitoring growth– It is important to keep track of how much the strategies and plans implemented are showing positive result in terms of revenue increase. This will help in deciding whether it is necessary to make any changes in the operational process, which is turn will lead to generation of ideas for increasing sources of income.
However, it is important to understand that such methods are endless in number and the more research is done, the more ideas will emerge. An organization should use their best minds and be ready with proper resources to grab opportunities as and when they come.
Let us understand the concept of multiple revenue streams with the help of a suitable example, as given below.
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.
The above example clearly shows how an organization can diversify its sources of income and how such revenue add to the funds of the entity and elp it strengthen its financial position for a long term.
Some important advantages of the concept additional revenue streams are as given below:
- 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. 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.
- 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.
Some disadvantages of the process are as follows:
- 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.
- Sometimes multiple streams of revenue can lead to acceleration of cost in various ways. This is because new product lines, supply chain, labor, transportation, storage, machinery etc is required to be employed which leads to huge cost.
- Both the overall operation and accounting process becomes very complex and time taking. It will also require engagement of more resources, better skills, strategies, effective communication, etc, that may put the business under a lot of pressure.
- There is an increase in competition, which can also put unnecessary pressure on resources, if things are not planned properly.
- There is also a possibility of facing various legal and regulatory problems due to multiple income sources and tax computations.
- If all revenue streams are not steady, and if one of them incur heavy loss, it will affect the overall working of the organization.
Thus, the above are some noteworthy advantages and disadvantages of the concept of additional revenue streams.
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. – 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.
This article has been a guide to Revenue Streams and its definition. We explain it with examples, types, how to create, advantages and disadvantages. You can more about financing from the following articles –