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When calculating net recurring revenue, you must not include any non-recurrent revenues in your calculation. This includes direct sales, one time payments such as domain names or software packages, and royalty income such as music or movie downloads.
Including these types of revenues in the equation will distort the true picture of how well your business is running. By excluding them, you get a more accurate view of just what kind of money your company makes!
Net recurring revenue is calculated by taking all of your recurring (regularly paid) expenses and services along with your recurrent assets and subtracting that from total revenue. The difference is your net recurring revenue.
This metric gives us our best estimate of how much profit your company earns on an annual basis. It does this by removing the effects of large one time expenditures and adding back in some of the costs that keep reoccuring every year.
In the previous section, we calculated gross revenue by adding up all of your income sources and then subtracting any significant expenses or costs of goods sold that were not included in the gross calculation.
But before you can calculate your net recurring revenue, you first need to determine what constitutes “income” for the purpose of this calculation. This could be considered either monthly, quarterly, annual, or lifetime income.
For example, if our hypothetical business offers an online course every month, it would count as monthly income. If the business also offers an additional online course once per year, it would likewise be counted as monthly income because it occurs once per month. If the yearly extra lesson is at the beginning of the year though, then it wouldn’t be accounted for until January when the next monthly payment is due.
This could get tricky, so make sure to account for such things! Luckily, there are some pretty straightforward rules about how to handle such situations. For more information, check out our article here: How To Track Monthly Income And Expenses More Effectively.
After you have determined your monthly, quarterly, annual, and lifetime income, you can now add them together to get your total gross income! Next, you will want to deduct any significant cost of goods or services consumed during the time frame being analyzed (monthly, quarterly, annual).
Once you have determined how much revenue you received in each period, you can now calculate your gross profit. This is the total amount of money made during the time frame minus the direct costs involved in producing the product or service.
Direct cost includes things like marketing expenses, shipping and logistics, website development fees, and so on. These are not recurred monthly revenues, they are one-time only costs that remain constant throughout the life cycle of the product.
Marketing costs may include paid advertising, influencer promotion, and indirect costs such as staff salaries. As with direct costs, these cannot be recovered within a given timeframe. For example, buying an advert for May will not continue to pay off in June!
With regards to shipping and logistics, this covers the expense of packaging the item, sending it via courier, storing the items until it reaches its destination, and any other overheads related to receiving and holding the merchandise.
The difference between gross profit and net recurring revenue is what happens after subtracting all direct costs. The rest is what must be reinvested back into the business to keep it alive and functioning.
This is where most entrepreneurs run into issues. They spend the majority of their income keeping the business afloat and developing new products or services. Unfortunately, this is also when problems arise; burn out, lack of motivation, and so on.
As hard as it may be, try to separate yourself from the business.
In the recurring revenue business, there is also what we refer to as net profits or gross profit. This is the difference between the amount of money you charged for something (your product or service) and how much money you made off of it.
For example, if you sold a box set of books at $20 per book, then your gross profit would be $4 per copy. After that, you have to pay shipping and handling costs, which can add up quickly depending on the size of the transaction.
So how do you calculate net profits? It’s actually pretty straightforward! You just take your gross income minus any direct expenses like shipping and marketing.
Net profits are important because they help determine whether or not you make a large income with this company. Many people assume that once you join a site as an affiliate, you get paid every month without doing anything else. But most affiliates don’t earn very much due to the low net profits they receive.
If you want to see true potential of the affiliate program, look into the net profitability of the products in the marketplace and compare that to yours. If others aren’t making as much money as possible, maybe it’s time to explore other options.
There are many ways to improve your net profitability, but first you must understand where your losses occur. By looking into these areas, you will know what to change to gain more revenue.
Once you have determined how much of your product or service costs is paid for up front, you can calculate your net recurring revenue (NRR) by subtracting what you pay for marketing and sales expenses from your cost of goods sold.
This number gives you an indication of how well your business is monetizing its investment. By adding this value to the initial cost of the product/service, you get your return on investment (ROI). Your NRR will fluctuate throughout the years as you spend more money to market and promote your products and services, but it will still remain greater than zero.
Net recurring revenue is also referred to as gross profit margin because it includes all income that does not go towards marketing and operating costs. This income can be split into two categories: direct and indirect. Direct revenues are those that directly come from the product or service being marketed, such as online courses pro-rated monthly tuition fees. Indirect revenues are things like referral bonuses or advertising commissions that depend on exposure to your brand.
A key part of determining if an expense is worth it is calculating the ROI. This calculation looks at the cost of the product compared to its benefits to determine if it was worth it.
You can use either internal or external metrics for this calculation. Internal metrics are those that relate directly to the company, while external ones are not.
Internal metrics include such things as how much money was spent in direct costs on production, marketing, and sales efforts, and how much revenue was generated. External metrics may include how many people interacted with the product, how popular it is, or whether it received positive reviews. These last two items are particularly important to consider as engagement trends show that more and more users prefer simple, easy-to-use products.
By using these metrics, you can calculate how much each dollar invested into the business paid off in terms of growth. You can then determine if this amount is justified by the returns achieved.
A key part of determining if you are investing in the right business model is looking at how much money you will make over time. This information is typically referred to as net recurring revenue or NRR for short.
Net recurring revenue is simply calculated by taking all of your company’s gross revenues and then subtracting what it costs to run the business each month.
The number you get left with is how much money you will earn per month, or NRR. You can use this figure to determine whether or not to continue to invest in the company or find another one that gives you better returns.
If the NRR rises more quickly than your expenses, then the equation becomes an argument for keeping the current business model. It shows that people are willing to pay enough to have products and services that matter to them, which is a positive sign.
A key part of determining how much money you will make as a business owner is knowing how many people you have that continue to spend time with you or pay you recurring fees.
This includes customers who purchase a monthly subscription service, yearly membership packages, or regular purchases at expensive price points.
By adding up all these costs, we are able to calculate what we refer to as “customer growth”. This is our net recurring revenue (RR) amount, which is calculated by taking MRR – Direct expenses = RR.
Direct expenses refer to those costs that don’t add to the profitability of the company. These include things like website hosting, marketing materials, and office supplies.
Customer growth is important because it tells us two things: 1) how much money we can expect to earn in the future and 2) whether or not we are investing enough in growing the business.
A key part of determining if you should launch or cancel a new business deal is looking at how well your company is growing. You can do this by calculating net recurring revenue (NRR).
Net recurring revenue is calculated as monthly gross revenues less total costs than the previous month. This is important to know because it gives us an idea of how much money you make per month, but it also tells us how well your department is doing.
If you are making more per month than the last month, then your team is succeeding in their mission! They are bringing in enough income to cover operating expenses, which is great.
However, if you are spending more per month than the last month, then something may be going wrong. Your budget may not have sufficient headroom for additional expenditures, or your team could be spending too much time on overhead activities like payroll and marketing that take away from productive work.
By using NRR, we can determine if there are problems within your organization or if things are just naturally slow right now.
