Revenue Streams

The amount earned by a business from the sale of goods or provision of services

What are Revenue Streams?

Revenue Streams are the amount of money a business earns from the sale of goods or provision of services. The types of revenue a business records on its accounts depend on the types of activities carried out by the business. Generally speaking, the revenue accounts of retail businesses are more diverse compared to businesses that provide services.

 

Revenue Streams theme

 

Types of Revenues

To classify revenues at a high level, there are operating revenues and non-operating revenues.  Operating revenues describe the amount earned from the company’s core business operations. Sales of goods or services would be an example of operating revenues. Non-operating revenues refer to the money earned from a business’ side activities. Examples include interest revenue and dividend revenue.

You can easily name hundreds of different revenue accounts that are used by businesses in various industries. For the majority of the companies, following are a few common revenue accounts:

  • Revenue from good sales or service fees: This is the core operating revenue account for most businesses, and they are usually given specific names such as sales revenue or service revenue.
  • Interest revenue: This account records the interest earned on investments such as debt owned. This is usually a non-operating revenue.
  • Rent revenue: This account records the amount earned from renting out buildings or equipment, and is considered non-operating revenue.
  • Dividend revenue: The amount of dividend earned from holding stocks of other companies. This is also non-operating revenue.

 

Examples of Revenue Streams

Revenue streams categorize the earnings a business generates from certain pricing mechanisms and channels. To describe it simply, a revenue stream can take the form of one of these revenue models:

  • Transaction-based revenue: Proceeds from sales of goods that are usually one-time customer payments.
  • Service revenue: Revenues are generated by providing service to customers and are calculated based on time. For example, the number of hours of consulting service provided.
  • Project revenue: Revenues earned through one-time projects with existing or new customers.
  • Recurring revenue: Earnings from ongoing payments for continuing services or after-sale services to customers. The recurring revenue model is the most used by businesses because it is predictable and it assures the company’s source of revenue. There are many different examples of recurring revenue streams:
    • Subscription fees (i.e. Netflix recurring revenue stream)
    • Renting, leasing or lending assets
    • Licensing content to third parties
    • Brokerage fees
    • Advertising fees

 

Revenue Stream Types

 

Importance of Revenue Streams

 

#1 Revenue is a Key Performance Index (KPI) to all businesses

As a financial analyst, analyzing a company’s performance in terms of revenue would always be one of the crucial tasks.  Therefore, an analyst must be able to recognize the different revenue streams from which the company generates cash and interpret the revenue figures on financial statements.

When a financial analyst looks at financial statements, the revenue number reflects the amount recognized by the company when goods are sold or services rendered regardless of whether cash is received.

 

#2 Performance prediction differs between different revenue streams

Out of the four revenue streams discussed, recurring revenue is the most predictable income to a business because it is expected that the cash inflow remains consistent with a stable customer base.  In contrast, transaction-based and service revenues tend to fluctuate with customer demand and are more difficult to foresee.  Seasonality is also often a major factor contributing to the variability in sales of goods and service.

Project revenue is the most volatile and risky revenue stream out of the four because it is largely contingent on customer relationships. Therefore, businesses would need to invest a considerable amount of time managing their relationships to maintain their revenue source.

Understanding the revenue stream allows a financial analyst to realize the pattern of cash inflows, and therefore will be able to quickly observe unusual movement in revenue trend and identify the causes.  This is when an analyst performs financial analysis and provides a meaningful explanation for variances.

 

#3 Different forecasting models are needed for different revenue models

Depending on the type of revenue models a company employs, a financial analyst would develop different forecasting models and carry out different procedures to obtain necessary information when performing financial forecasting.  For companies with a recurring revenue stream, a forecast model should have a uniform structure and a similar pattern in revenue predictions.

For a project-based revenue stream, it is essential for an analyst to keep track of the latest project opportunities and continuously modify the forecast model to produce an accurate forecast.  The forecast model might look very different each month due to the constant renewal of projects taking place and the inclusion of various risk factors.

 

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