Understanding recurring revenue

Definition

Recurring revenue is the repeating earned slice of sales that comes back on a membership or contract schedule. On the books, this is still revenue on the Income Statement, not a separate pile of cash and not a dashboard metric.

A gym that earns monthly dues each month a member can use the floor has that repeating slice. A one-time towel sale in the lobby is not it.

Cash-basis books often record the dues when the card is charged. Accrual books record the slice in the month it is earned, even if the member prepaid a year.

This line is earned, repeating sales. It is not the whole prepaid contract sitting in the bank.

Where it shows up

Balance Sheet: Related to cash collected before the period is earned.

P&L: Located in revenue as the repeating slice of earned sales.

Cash flow: Increases when collected, reported cash from operating activities increases.

See also: Monthly Recurring Revenue · Annual Recurring Revenue · Revenue

When you look at your Income Statement, this slice sits in revenue with the other earned sales. The gym may keep a membership income account so the repeating dues are easy to see.

When the repeating slice is high, more of the month's sales will likely return next month. When it is low, the gym is leaning on drop-in fees and one-time sales that do not come back on a schedule.

The Balance Sheet does not list this slice as a permanent account after the close. Prepaid unused months sit in deferred revenue until they are earned.

On the Statement of Cash Flows, collecting dues is an operating inflow. Earning a prepaid month later does not raise cash a second time.

How it works

A member joins and agrees to a repeating charge, or pays a block of months up front. The gym then earns one period at a time as access is provided.

If the member pays each month as they go, the shop debits cash and credits membership revenue. That month's repeating slice is earned and collected together.

If the member prepays a year, cash comes in once and the unused months sit as a liability. Each month the gym then debits deferred revenue and credits membership revenue for that month's earned slice.

The repeating slice is the earned amount, not the prepaid cash. A January collection of twelve months is not twelve months of January revenue.

Monthly recurring revenue and annual recurring revenue are ways people measure this slice. They are metrics, not extra ledger accounts.

Churn is members who stop. The repeating slice shrinks when they leave, and it grows when they add a second membership or a family add-on.

Stay with the earned repeating sales when you read the month. The bank balance explains what was collected, and this slice explains what came back on the schedule.

A one-time personal-training package is not this slice unless the gym has turned it into a repeating plan. Day passes and retail drinks are ordinary sales.

Keep a roster of active memberships that supports the period total. Anyone tying the P&L to the billing file should be able to see which dues were earned this month.

Do not treat the leftover prepaid liability as earned sales. That leftover is still deferred until the months run.

Example

A gym collects $960 on January 1 for a twelve-month membership. The member can use the floor all year.

January's earned repeating slice is $80, not $960. The gym records the month that was earned:

Debit: Deferred revenue $80

Credit: Membership revenue $80

January's Income Statement shows $80 of membership revenue from this member. The other $880 stays on the Balance Sheet as deferred revenue.

February will earn the next $80 the same way. Cash does not move again with those later months.

If a different member pays $80 by auto-pay each month, that $80 is also this slice. The repeating earned amount is the same idea, collected one month at a time.

Common mix-ups

Recurring revenue is not the prepaid cash in the bank. Prepaid unused months are deferred revenue, and this slice is only the part that has been earned.

Recurring revenue is not monthly recurring revenue. Monthly recurring revenue is a one-month normalized metric, and this page is the repeating earned sales themselves.

Recurring revenue is not a one-time job. A single personal-training package that does not repeat is ordinary revenue, not this slice.

Related terms

• Monthly Recurring Revenue: Normalized subscription revenue for a single month.
• Annual Recurring Revenue: Monthly recurring revenue expressed on a yearly basis.
• Deferred Revenue: Cash collected from customers before the work is delivered.
• Churn Rate: The share of customers or revenue lost over a period.
• Net Revenue Retention: Revenue kept from existing customers including upgrades, after churn and downgrades.
• Revenue: The total value of goods and services the business earned in a period.
• Recurring Invoice: An invoice generated automatically on a repeating schedule.
• Backlog: Signed work that has not yet been delivered or recognized as revenue.