The power of a recurring income

Continuing his regular column of business advice, Aaron McLeish shows how developing routes for a recurring income can help a business grow profits more predictably.  

I’m a strong believer in recurring income. A recurring income stream is income that comes in regularly, on a predictable basis, in exchange for an ongoing service. Recurring income (or recurring revenue) can come in weekly, monthly, or annually, and is earned on a regular basis rather than as a one-time payment. This can be extremely beneficial to any business.

Most of your business and even household bills will be paid monthly via direct debit. Think of your van payments, insurance, phone or software providers. These may all be paid on a monthly basis. 

Consistent and predictable

Recurring income could take many forms for a plumbing and heating business. It could be a monthly boiler service and maintenance plan for a domestic customer, or you may look after a letting agent, where you are the go-to firm for all of their CP12, for example. Moving up the scale, it could take the form of big contracts with a local housing association or council authorities, where a plumbing and heating business is responsible for a large portfolio of properties for a set budget for a set period. Recurring income even includes marketing efforts or paying for leads which generate consistent work. 

When you can predict the work ahead, invoice for it, and have money land in the bank, then you have recurring income.

If you know in a given period that you are going to service or install X amount of boilers that will generate X amount of revenue, you can then work backwards from your sales figures and allocate the gross profit to your everyday business’s operational expenses. In accounting, we call this contribution.

Planning for the future

Monthly recurring income lets you plan better for business in the future. You’ll know what will come in, which in turn will mean you can plan what can go out (expenditure). In addition, you can plan your workload better, deploy staff, not have the stress or worry of seasonality, and you can generate positive cash flows.  

Let’s say you’ve got £10,000 of recurring income in one month. With that, you now have predictable money that can enable you to hire an engineer, plus give them a van, fuel, software, and training. 

By generating recurring income, you give yourself the freedom and financial backing to grow your business in a systematic, predictable way. This will enable you to expand without worrying about whether there will be enough money coming in each month to pay everyday expenses. Since it takes time and effort to establish a successful business, being able to develop and expand at a pace that doesn’t disrupt your cash flow is essential for sustained growth without over-trading. As your monthly recurring income grows, so can your monthly expenses (obviously keeping your income higher than your expenses!).  

Adding employees

I was once asked by a plumbing and heating business owner: “When is the right time to hire my first employee?”

My response was based on the above information. Taking on your first hire may be a daunting experience, knowing that you are responsible for a salary or another household. As a business moves from being a start-up to an established reputable firm, I feel that keeping your costs variable (i.e. they change in proportion to sales) is advisable. 

For a plumbing and heating firm, this may take the form of hiring subcontractors for a few days a week, while you build your recurring income. Once your recurring income is at a level that enables you to take on more costs (so that your recurring income is more than your recurring expenses, which include a full-time salary expense), then a business could take on a full-time employee instead of a subcontractor, knowing that all of the associated costs of hiring staff are covered and more.  


QUICK TIP! 

Strive to think of the lifetime value of a customer: what do they want and need? Then ensure that this is delivered. It’s often cheaper to look after existing customers as opposed to fishing for new customers all of the time.


As the director of Together We Count, Aaron McLeish is an accountant specialising in the plumbing and heating sector. Aaron is also author of The Quote Handbook. Visit the website here: 

www.togetherwecount.co.uk

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