What Is Recurring Revenue

Recurring revenue is a company’s sales that are most likely going to repeat. An example of a recurring revenue source would be a contract a company has with a customer which guarantees future payments, such as a subscription.

How To Interpret Recurring Revenue

A company with high levels of recurring revenue demonstrates reliability. In times of economic uncertainty, recurring revenue can ensure survival. This is because a company with recurring revenue will typically have less volatile financial results. A consistent stream of revenue, via recurring revenue, will allow companies and investors to better predict future cash flows and react accordingly.

Example of Recurring Revenue

A specific example of recurring revenue is a monthly subscription to a software-as-a-service (SaaS) product. For instance, let’s say a company offers a cloud-based project management tool that helps teams collaborate and manage their work efficiently. The company charges $10 per user per month for access to the tool.

If a team of 10 people signs up for the service and continues to use it every month, the company would earn $100 in recurring revenue every month from that team alone. As long as the team continues to find the tool useful and keeps paying for it, the company will continue to earn that recurring revenue month after month.

Over time, as the company acquires more customers and grows its user base, the recurring revenue can add up significantly and provide a stable source of income for the company. Plus, since the revenue is recurring, the company can predict its cash flow more accurately and invest in growth initiatives accordingly.

How Reliable Are Recurring Revenues?

Unfortunately not all recurring revenues are guaranteed to continue indefinitely. For example, customers may cancel their subscriptions and terminate that source of recurring revenue for a company. These changes can be sudden and unpredictable, dampening the reliability of recurring revenue streams. However, there are certain recurring revenue sources that are as close to certain as possible. Some contractual structures nearly guarantee recurring revenue. In conclusion, it is important to analyze each recurring revenue case individuals to gauge its reliability.