“There’s an inconvenient truth in business that most CEOs and entrepreneurs alike tend to overlook: not all revenue is created equal. Sure, a dollar in sales is a dollar in sales. But the more predictable that dollar is, as in the more likely that you will receive that dollar from your customer every month, the more valuable it becomes. When you begin to multiply that dollar by adding new customers and creating an annuity of cash flow, you begin reaping the benefits of what is known as a recurring revenue stream.
What makes recurring revenue so valuable is that you can spend more of your energy growing your business rather than on trying to acquire enough new or repeat business just to hit the same revenue level you did the year before. Let’s say you run a business with $10 million in sales, 90 percent of which is recurring. Since you can already bank on receiving $9 million as you kick off your next fiscal year, you need to find just an additional $1 million to match your prior year’s result. Anything you add beyond that is all growth. Compare this to a business built with no recurring revenue. You might earn $10 million in a single year. But, every subsequent year you begin again at $0 – something that makes it difficult to sustain growth.
The beauty of recurring revenue is that because you can predict what you’re going to earn, you face less risk – something that investors love (one private equity firm even hands out bumper stickers that say: “I heart recurring revenue”). In fact, the more recurring revenue a company has, the higher the valuation it will receive from prospective investors and buyers. That’s why recurring revenue has become the gold standard of business models and something that every CEO should be working towards building into their own business.”
Original Article by Jim Schleckser, Inc. of Inc CEO Project
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