A revenue stream is a source of revenue of a company or organization. In business, a revenue stream is generally made up of either recurring revenue, transaction-based revenue, project revenue, or service revenue. In government, the term revenue stream often refers to different types of taxes.
Importance of Revenue Streams
- Revenue is a Key Performance Indicator (KPI) for all businesses: As a financial analyst, analyzing a company’s performance in terms of revenue is always one of the crucial tasks. Therefore, an analyst must be able to recognize the different revenue streams from which the company generates cash and interpret the revenue figures on financial statements. When a financial analyst looks at financial statements, the revenue number reflects the amount recognized by the company when goods are sold or services rendered, regardless of whether cash is received at that time.
- Performance prediction differs between different revenue streams: Out of the four revenue streams listed above, recurring revenue is the most predictable income to a business because it is expected that the cash inflow remains consistent with a stable customer base. In contrast, transaction-based and service revenues tend to fluctuate with customer demand and are more difficult to foresee. Seasonality is also often a major factor contributing to the variability in sales of goods and services. Project revenue is the most volatile and risky revenue stream out of the four because it is largely contingent on customer relationships. Therefore, businesses need to invest a considerable amount of time in managing their relationships to maintain this revenue source. Understanding the revenue stream enables a financial analyst to realize the pattern of cash inflows, and therefore be able to quickly observe unusual movement or changes in revenue trend, and identify the causes. This is when an analyst performs financial analysis and provides a meaningful explanation for variances.
- Different forecasting models are needed for different revenue models: Depending on the type of revenue models a company employs, a financial analyst develops different forecasting models and carries out different procedures to obtain necessary information when performing financial forecasting. For companies with a recurring revenue stream, a forecast model should have a uniform structure and a similar pattern in revenue predictions. For a project-based revenue stream, it is essential for an analyst to keep track of the latest project opportunities and continuously modify the forecast model to produce an accurate forecast. The forecast model might look very different each month, due to the constant renewal of projects taking place and the inclusion of various risk factors.