RUN · Business Foundations / Module 3 of 5Free
M03
Where Revenue Comes From
Revenue that looks healthy in total can rest on one channel, one product or one customer.
Revenue is usually reported as a single figure, as if every shilling of it were the same. It is not. Some revenue arrives predictably every month from customers who will stay for years; some arrives once and will not return. Some carries healthy margin and some barely covers its cost. This module teaches the owner to look beneath the total.
You will
- Break revenue down by source, channel, customer type and product
- Distinguish recurring, repeat and one-off revenue
- Measure concentration risk by customer and channel
- Judge the quality of revenue, not just its size
By the end you will have
- A revenue map showing each stream by recurrence, margin and share of gross profit
- Your base cover and the size of next year's revenue cliff
- Concentration measured for customers, channels and relationship-holders, against ceilings
- Each stream placed on the revenue quality grid with a decision
Time to apply: about half a day, most of it splitting invoices
The case · IT support firm, 18 people
The record year that worried the bank
Nexa Technology Services supports the computers, networks and cloud systems of about 60 small and medium businesses in Johannesburg. Last year was its best ever: revenue grew 31% to R14.4 million. The two salespeople earned record commission, paid at 5% of everything they sold.
When the founder, Thabo, applied to his bank for a facility to fund a second office, the credit analyst asked three questions he could not answer. How much of the revenue will repeat next year? How much depends on your largest customers? What happens if your senior engineer leaves?
Thabo knew the total. He had never broken it down. When his finance manager did, she found that the year's largest customer, a logistics company that brought in R2.9 million, had paid for a one-off system migration that was now finished.
- Revenue
- R14.4 million (+31%)
- Gross profit
- R4.9 million (34%)
- Fixed costs
- R4.4 million a year
- Largest customer
- R2.9 million (20%), a finished project
- Sales commission
- 5% of revenue, any type
- Managed-service clients
- 38, on monthly contracts
Should Thabo keep rewarding his salespeople for total revenue, or redesign targets around the revenue that repeats?
Before you read on: form your own view
- 1.How much of last year's R14.4 million do you expect to repeat this year?
- 2.What does a 5% commission on all revenue encourage salespeople to sell?
- 3.What would you want to know before lending Thabo money for a second office?
Write your answer down. We return to this case after the worked example.
Step 01 / 13
The business problem
Underneath the revenue line sit very different streams: one-off sales and repeat orders, walk-in customers and contracts, high-margin services and low-margin resale. Each has its own risk, its own cost to win and its own contribution to profit. Reporting them as one number hides these differences.
The consequence is twofold. Risk goes unseen, because a business can appear healthy in total while depending heavily on one channel, one product or one customer. And sales effort is misdirected, because salespeople naturally pursue whatever revenue is easiest to win, which is rarely the revenue the business most needs.
Nexa's revenue was real, but its quality was poor and nobody had looked. Almost half of it came from one-off projects that would not recur, a quarter from hardware resale at thin margins, and only about 30% from monthly contracts that would still be there next year. The commission plan paid the same for a rand of hardware at 12% margin as for a rand of contract revenue at 55%, so salespeople pursued whatever was largest and fastest to close.
The danger in a revenue map is not what it shows but what the single total hides: a revenue cliff when big one-off work ends, dependence on a few customers or one person, and a sales effort aimed at the revenue the business needs least.
Why it matters
Understanding the structure of revenue allows the owner to decide which streams to grow, which to protect and which to retire. It also shows how exposed the business is to the loss of a single customer, channel or product, a question that becomes pressing the moment a bank, investor or potential buyer asks it.
Most importantly, it shifts the conversation from the size of revenue to its quality. Two businesses with identical turnover can be worth very different amounts, and the difference usually lies in the predictability and profitability of what they earn.
What it costs when it is left alone
- Next year begins with a hole: one-off revenue must be replaced before growth can even start.
- Incentives reward the easiest revenue to win, which is rarely the most valuable or the most predictable.
- Concentration in a customer, channel or person goes unnoticed until it is lost.
- Fixed costs are taken on against revenue that will not repeat.
- Lenders, investors and buyers value the business lower, because they discount unpredictable revenue heavily.
Step 02 / 13
The decision
Which revenue streams should you grow, protect or retire, and what should your sales targets reward?
Total revenue is the number everyone celebrates, and changing what salespeople are paid for is uncomfortable. A shift towards recurring revenue often makes the next few months look worse: a monthly contract is smaller than a project invoice, even though it is worth more over two years. The owner has to choose quality over size while the size number is still the one people watch.
Grow recurring revenue
Shift sales effort and rewards towards contracts and subscriptions that repeat.
Protect what repeats
Retention and service quality for repeat customers become explicit priorities.
Reduce concentration
Set limits on dependence on one customer, channel or person, and plan to reach them.
Retire low-quality streams
Stop or reprice revenue that is unpredictable and earns little.
Step 03 / 13
The concept
Revenue has a structure as well as a size. Looking at it through four lenses shows that structure: where it comes from (stream, product, channel), how it recurs (recurring, repeat or one-off), how concentrated it is (in customers, channels or people), and what it earns (margin).
Recurring revenue is contracted to continue: monthly retainers, subscriptions, service agreements. Repeat revenue comes from customers who buy again without being contracted to. One-off revenue comes from projects and single purchases that must be won again every time. A business with a large recurring base starts each year with most of its fixed costs already covered; a business built on one-off work starts each year near zero.
Revenue quality is the combination of predictability and profitability. Two businesses with the same turnover can be worth very different amounts, because buyers and lenders pay for revenue they can rely on. Improving revenue quality is often worth more than growing revenue size.
- Recurring revenue
- Revenue contracted to continue: subscriptions, retainers, service agreements.
- Repeat revenue
- Revenue from customers who buy regularly without a contract.
- One-off revenue
- Projects or single sales that must be won again each time.
- Concentration
- The share of revenue from your largest customer, top five customers, single channel or single relationship-holder.
- Base cover
- Recurring gross profit ÷ annual fixed costs. The share of fixed costs paid before the year begins.
- Revenue cliff
- Revenue in this year's total that will certainly not recur next year.
Step 04 / 13
The framework
Map revenue through four lenses, then judge each stream on predictability and margin. The map turns one number into a set of choices.
The KSL revenue map
| Lens | Question | What to calculate |
|---|---|---|
| 1. Source | Which streams, products and channels produce revenue? | Revenue and gross profit by stream and channel |
| 2. Recurrence | How much will repeat without being won again? | Recurring, repeat and one-off revenue; the revenue cliff |
| 3. Concentration | How dependent are we on a few customers, channels or people? | Share of largest customer, top five, top channel, revenue held by one person |
| 4. Quality | Which revenue is predictable and profitable? | Margin by stream; base cover |
Base cover
Recurring gross profit ÷ annual fixed costs
Below 50%: every year starts with a large gap to fill. Above 100%: the business covers its fixed costs before it sells anything new.
Revenue cliff
One-off revenue this year that has no follow-on work
Next year's growth starts only after this amount is replaced.
Reprice or bundle
Reliable but thin. Raise prices, bundle with services, or reduce cost to serve.
Core: grow and protect
Predictable and profitable. Build sales targets and incentives around this.
Question it
Unpredictable and thin. Keep only if it leads to better revenue.
Convert
Profitable but one-off. Design follow-on contracts so projects become recurring relationships.
← Low margin
High margin →
| Concentration measure | Working ceiling for an SME | Why |
|---|---|---|
| Largest customer | 15–20% of revenue | Above this, its decisions shape yours |
| Top five customers | 50% of revenue | Above this, losing two is a crisis |
| Largest channel | 60% of new revenue | One platform or partner can change terms |
| Revenue held by one person | 10–15% of revenue | Relationships leave with people |
The rule that matters most
Pay people for the revenue the business needs, not for the revenue that is easiest to win. Incentives that reward total revenue will always tilt the business towards size over quality.
Step 05 / 13
Diagnostic questions
Answer from your accounts where you can. Where you cannot, note that the data does not exist: that is itself a finding.
The questions this module must answer for your business
- 01What share of revenue is recurring or repeat?
- 02How much depends on our top five customers?
- 03Which channel produces our most profitable revenue?
- 04Which revenue would disappear if one person left?
Structure today
- Can you split last year's revenue by stream and by recurring, repeat and one-off? How long would it take?
- What share of this year's revenue was contracted before the year started?
- Which stream earns the highest margin, and which grew fastest? Are they the same?
Concentration and dependence
- What share of revenue came from your largest customer and your top five? What was it three years ago?
- Which revenue would disappear if one particular person left? How much?
- How dependent are you on one channel, platform, partner or referral source?
Incentives and direction
- What do your salespeople, and you, get rewarded for? What behaviour does that create?
- How much of last year's revenue will certainly not recur? What is your plan to replace it?
- If a buyer or lender asked how predictable your revenue is, what evidence would you show?
Step 06 / 13
Worked example
The finance manager took two days to split the year's invoices. All amounts in rand millions.
Nexa Technology Services: mapping R14.4 million
1.Split revenue by stream and recurrence
Stream Recurring Repeat One-off Total Gross margin Gross profit Managed IT contracts (38 clients) 4.3 – – 4.3 55% 2.37 Projects (installs, migrations) – – 5.8 5.8 30% 1.74 Hardware resale – 2.6 0.9 3.5 12% 0.42 Ad hoc support (hourly) – 0.8 – 0.8 45% 0.36 Total 4.3 (30%) 3.4 (24%) 6.7 (47%) 14.4 34% 4.89 Managed contracts are 30% of revenue but 48% of gross profit. Hardware is 24% of revenue and 9% of gross profit.
2.Calculate base cover and the revenue cliff
Base cover
Recurring gross profit 2.37 ÷ fixed costs 4.4 = 54%
Nexa starts each year needing to win nearly half its fixed costs again.
Of the R5.8 million of projects, R4.6 million had no follow-on work, including the R2.9 million migration for the largest customer. Next year begins R4.6 million behind before any growth.
3.Measure concentration
Measure Nexa Working ceiling Assessment Largest customer 20% (one-off project) 15–20% At the limit, and about to disappear Top five customers 46% 50% Close to the limit Largest channel (Microsoft partner leads) 52% of new revenue 60% Acceptable Held by one person (senior engineer, six clients) R2.4m (17%) 10–15% Above the limit 4.Look at what the incentives reward
Stream Commission at 5% of revenue Gross profit Commission as % of gross profit Managed contracts 0.22 2.37 9% Projects 0.29 1.74 17% Hardware resale 0.18 0.42 42% The commission plan gave away 42% of the gross profit on hardware and only 9% on contracts. A salesperson closing a R300,000 hardware order earned the same as one closing a contract worth R25,000 a month for at least two years.
5.Place each stream on the quality grid and decide
Stream Quadrant Decision Managed contracts Core: grow and protect Make it the main sales target Projects Convert Every project proposal includes a follow-on managed contract Hardware resale Reprice or bundle Sell only with a contract or at a higher margin; no commission on stand-alone hardware Ad hoc support Core (small) Use as the entry point to a contract
The lesson
Nexa's record year was mostly a collection of one-off wins paid for with commission that rewarded size. Mapping revenue through four lenses showed that the business's real asset was its contract base, and that the incentive plan was steering effort away from it.
Back to the case: The record year that worried the bank
Thabo postponed the second office and redesigned the commission plan: 10% of gross profit on projects and hardware, and for managed contracts a payment equal to two months of contract value, half on signing and half after six months if the client stays.
He set two targets for the next 18 months: recurring revenue at 45% of the total, and base cover at 80%. He also introduced a second engineer to every client the senior engineer looked after.
Twelve months later total revenue was slightly lower at R13.8 million, but managed contracts had grown to 52 clients and R6.1 million. Base cover had risen to 76%. The bank approved the facility on the second application.
Compare this with the view you wrote down at the start. What changed, and why?
Step 07 / 13
Apply it to your business
Now do the same for your business. Allow about half a day, most of it splitting invoices.
Gather this first
- Sales invoices or a revenue report by customer for the last 12 months
- A list of contracts and subscriptions in force, with monthly values
- Approximate gross margin by product or service type
- Annual fixed costs from your accounts
- Your sales commission or bonus scheme, if you have one
- Who holds each major customer relationship
- 1
Define your streams
List three to eight streams whose economics differ: product lines, service types or channels.
- 2
Split each stream by recurrence
For each stream, enter how much was recurring (contracted), repeat (customers who buy regularly) and one-off.
- 3
Add gross margin
Enter the approximate gross margin for each stream. The worksheet calculates gross profit and base cover.
- 4
Map concentration
In part B, list your top ten customers, who holds each relationship, and how much would be at risk if that person left.
- 5
Identify the revenue cliff
Note the one-off revenue that will not recur next year.
- 6
Place streams on the quality grid
Decide which streams to grow, protect, convert, reprice or retire.
- 7
Check what your incentives reward
Compare what salespeople (and you) are paid for with the streams you want to grow.
Step 08 / 13
Worksheet
Use the last 12 months. Enter amounts in one currency unit. Your entries are saved in this browser.
Revenue map
ARevenue by stream and recurrence
| Stream | RecurringContracted | RepeatRegular, uncontracted | One-off | Gross margin (%) | Total | Gross profit | Share of revenue | Share of gross profit | Recurring gross profit | Quality grid | Remove |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Total | – | – | – |
- Total revenue
- –
- Recurring share
- –
- Predictable share (recurring + repeat)
- –
- Gross margin overall
- –
- Base cover
- –
BCustomer and relationship concentration
List your top ten customers. Enter total revenue for the business in the box so shares can be calculated.
| Customer | Revenue | Mostly | Relationship held by | At risk if that person left | Share of revenue | Remove |
|---|---|---|---|---|---|---|
| Total | – | – |
- Largest customer's share
- –
- Share of listed customers
- –
- Revenue at risk from one person leaving
- –
CRevenue cliff and incentives
Step 09 / 13
Interpret your results
A completed worksheet is evidence, not a conclusion. Read it before you decide.
- 1.Which stream has the largest gap between its share of revenue and its share of gross profit?
- 2.What is your base cover? How much of next year's fixed costs is already paid for?
- 3.How big is your revenue cliff, and how many months of selling will it take to replace?
- 4.Which concentration measure is furthest above its ceiling?
- 5.Does your incentive plan pay more for the revenue you need, or for the revenue that is easiest to win?
- 6.What surprised you? Which stream did you think was more important than it is?
| If you find… | It usually means… |
|---|---|
| Recurring revenue below 25% and base cover below 50% | The business is rebuilt from scratch every year. Converting projects and repeat buyers into contracts is the priority. |
| The fastest-growing stream has the lowest margin | Size is growing at the expense of quality, usually because incentives reward revenue. |
| Largest customer above 20% on one-off work | A revenue cliff is coming. Plan its replacement now. |
| One person holds more than 15% of revenue | Introduce a second contact for every major client and record the relationships in a shared system (see M27). |
| Commission as a share of gross profit varies widely by stream | Incentives are steering effort. Pay on gross profit or weight recurring revenue. |
| You could not split revenue by recurrence | Your invoicing does not record what kind of revenue it is. Add the category to every invoice going forward. |
Step 10 / 13
Make the decision
Decide what your targets and incentives will reward, and what you will do about each stream and each concentration risk.
Redesign targets around recurring revenue
Choose this whenBase cover is low and incentives reward total revenue.
What followsSet recurring-share and base-cover targets; pay more for contracts than for one-off sales.
Convert one-off work
Choose this whenProjects are profitable but end without follow-on.
What followsAdd a follow-on contract offer to every project proposal.
Reprice or bundle low-margin streams
Choose this whenA predictable stream earns very little.
What followsRaise prices or sell only alongside higher-margin services.
Reduce concentration
Choose this whenA customer, channel or person is above its ceiling.
What followsSet a dated limit and a plan: second contacts, new channels, new customers.
Keep the current approach
Choose this whenRevenue is already predictable, diversified and profitable.
What followsProtect it: monitor recurrence and concentration quarterly.
Your decision record
Step 11 / 13
Action plan
Changing incentives takes a quarter to agree and a year to show in the numbers. Edit these to fit your decision.
Implementation cycle: 30 / 60 / 90 days
| Action | Owner | Deadline | Expected result | Resources needed | Measure of success | Review date | Remove |
|---|---|---|---|---|---|---|---|
| Days 1–30: Map | |||||||
| Days 31–60: Redesign | |||||||
| Days 61–90: Start and measure | |||||||
Step 12 / 13
Management routine
Revenue quality drifts back towards whatever is easiest to sell unless it is watched.
Monthly
Recurring share, base cover and new contracts signed
- Is recurring revenue growing faster than total revenue?
- Which contracts ended, and why?
Quarterly
Concentration review
- Has any customer, channel or person moved above its ceiling?
- How much of next year's revenue is already contracted?
Annually
Full revenue map and incentive review
- Do incentives still reward what we need?
- What is next year's revenue cliff?
Step 13 / 13
Final output
By the end of this module you should have
- A revenue map showing each stream by recurrence, margin and share of gross profit
- Your base cover and the size of next year's revenue cliff
- Concentration measured for customers, channels and relationship-holders, against ceilings
- Each stream placed on the revenue quality grid with a decision
- A recorded decision on what sales targets and incentives will reward
- A 90-day plan and a monthly routine for revenue quality
When the problem is bigger than this module
Mapping revenue is quick; changing its structure takes longer and touches sales roles, pricing and how projects are scoped. If the map shows that the business must move from project work to recurring contracts, or that relationships are concentrated in a few people, a Growth Partnership can work through it with you, together with sales architecture (M47), customer retention (M49) and business risk (M55).