One of the most formidable challenges that small business face is the unpredictable nature of sales volumes. Building a business model based on recurring revenue is one way to address this challenge. When you sign up customers for products or services delivered via a subscription model, you improve your ability to anticipate how much incoming revenue you will have available. This consistency enables you to budget and plan business expenditures with a greater degree of accuracy than if you were simply offering a product or service, and then waiting to see who purchases it.
Calculate the amount of revenue that your business needs to generate to meet its fixed costs. Include the sums you pay for rent, utilities, licenses and taxes. Because you must cover these expenses regardless of whether your recurring revenue is substantial or minimal, you will need to transact a specific number of recurring sales to simply break even on your fixed costs. Developing a clear idea of your fixed costs will enable you to divide this sum by the number of recurring transactions you make, to calculate the sales volume that your business needs to sustain itself.
Calculate the percentage of revenue that your company typically spends on variable expenses such as materials and labor. For example, if it typically costs you $20 in labor to make a $100 service visit to a client's home, then your variable labor cost percentage is 20 percent. Include all expenses that fluctuate directly in relation to the number of customers you serve or the number of products you sell.
Calculate a break-even point that reflects the number of recurring transactions your company must make to cover both fixed and variable expenses. Use this break even point as a benchmark when determining the number of recurring client subscriptions you must make during each sales period.
Allocate money from recurring-revenue transactions first to pay for recurring expenses, such as fixed and variable expenses. Use additional revenue for discretionary expenses such as marketing and investing in additional infrastructure such as equipment. Build your sales volume over time by adding additional customers and also by adding additional recurring products and services, and plan additional expenditures using a timeline based on recurring customer payments.
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