Why Revenue Is An Important Metric For Your Business

What is revenue and why you should use it to analyze your business

Revenue although a common term used in many businesses often goes underlooked. Many a time, the business owner know of their company’s revenue but fails to understand and plan for it. This is especially important when it comes to budgeting and planning for future company ventures.

What Is Revenue?

Revenue is what keeps your business growing and allows you to expand. Revenue should be the backbone of any modern-day business without revenue, there can be little to no growth or expansion opportunities. Revenue comes from a lot of sources such as products/services sold, commissions earned and so on. It is important for every business owner to understand their company’s revenue and how it can be improved upon.

Revenue can also be thought of as the income your business generates from its core activities, products and services it offers to customers.

Does Revenue mean how much money I have?

No! Revenue is not the same thing as how much money you have. Revenue can be thought of more like earnings or sales for example, which are all different things.

Revenue on its own is only a number and does not mean anything until it has been broken down into categories – this will give an idea to your business owner what revenue they should be looking into and what can be improved on.

Why do I have to break down my revenue?

Revenue is made up of many different numbers, categories or components. Such as revenue from products/services sold, commissions earned etc… It’s important to understand your revenue as a business owner because it allows one to make sense of all the information they have collected about their company.

This is because each revenue source will have its own costs and although a particular product/service could be creating a high amount of revenue, the same could be said for the expenses created to create that high amount of revenue.

💡Now imagine that you used solely your revenue to plan for your business, you might be caught unaware when certain expenses directly related to a large percentage of your revenue start to creep up, which ends up crashing the entire revenue source.

How do I understand my Revenue?

It’s important for a business owner to understand their Revenue in order to plan and analyse it. Revenue is a very important figure for any business owner to look at.

Since your revenue is made up of various sources of services, commissions, etc… it’s important to understand this revenue figure in its components.

Ie. What % of my revenue is from sales, What % of my revenue is from a particular service.

Taking a step further, business owners should then understand the running costs and expenses to achieve said revenues. This could be along the lines of revenue per employee or simply running costs for operations.

Breaking down into various sources/components allows the business owner to analyse and plan on using their future Revenue projections (i.e Revenue from products/services sold) or even adjusting certain revenue models for specific sources.

Planning and using different revenue models

These are 2 types of revenue models to look at ; (1) Recurring Revenue Model and (2) Transactional Revenue Model.

Recurring Revenue Model

In this model, the source of revenue is generated through the sale of a product that is provided on an ongoing basis. Revenue is earned on a regular and repetitive basis (monthly, yearly etc…).

Examples of recurring revenue models are subscription-based products like your internet bills, memberships and service packages that charge over a period of time.

Revenue from the Recurring Revenue Model has an advantage over all other revenue models because it provides residual income and its cost of running it is usually minimal. It is not uncommon that businesses looking to secure their recurring revenue set up contracts to bind customers to a year-long service.

The main attractiveness of this type of revenue is its predictability. Revenue is more or less guaranteed, which helps the business to plan for future expansions or ventures.

Transactional Revenue Model

The source of revenue is generated in this model is through one-time sales of products or services. Revenue can be thought of as pure transactional sales with no recurring revenue.

Revenue from the Transactional Revenue Model is very good for businesses that have a high turnover rate and have a lot of one-off sales. Revenue from this type is often seen as short term and can fluctuate greatly with the seasons, periods etc…

Although, this model often comes with a large amount of revenue. One must be careful not to rely on the Transactional Revenue model due to its unpredictability. Making it difficult to plan for future business ventures.

This model often comes with a higher and uncertain cost such as an increase in supply costs or a sudden increase in service cost. Examples of these are prominent during the start of Covid where many businesses fail to anticipate the impact on the expenses required.

Revenue Planning & Analysis is important for all Business Owners! Revenue is very much a representation or indicator of how your company’s doing so it’s extremely vital.

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