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.
WHY DOEST IT MATTER TO HAVE RECURRING REVENUE.
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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