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Salt Lake City Bookkeeping Blog

How the “Rule of 78” Could Help You Reach Your Revenue Goals

Posted by Leanne Armstrong on Sep 12, 2018 9:00:00 AM

How the “Rule of 78” Could Help You Reach Your Revenue GoalsFrom yoga studios to hospitality services, many small businesses rely on multiple income streams to support their revenue goals. If your business activity lends itself to recurring sales, the Rule of 78 could be just the tool you need to take your company to the next level.  

The Rule of 78 is essentially a mathematical shortcut that lets you estimate annual revenue from subscriptions, membership fees, and other monthly recurring sales. It can be used to:

  • extrapolate year-end income from your current monthly billings, and
  • set monthly sales targets to ensure you meet your annual revenue goals

The Rule of 78 is based on calculating consistent monthly amounts that extend over a full fiscal year, but you don’t need to be a math whiz to take advantage of it.

Whether you’re looking to expand your business revenue through recurring billings – or you just want to shore up your financial stability - seeking monthly sources of guaranteed sales can help. And the Rule of 78 will quickly tell you how much you need to generate in recurring fees to meet your income objectives. 

Why “78”?

The Rule of 78 is so named because, mathematically speaking, 78 is the number of monthly billing periods each full year contains. Don’t believe us? Let’s take a closer look at the numbers.

Consider that any recurring sales amounts you manage to snag in January – a single, $50 monthly membership fee, for example - contributes 12 full months of billing to your annual sales total, or $600 (12 x $50). Recurring sales of that same single membership earned in February, meanwhile, contribute 11 billing months, or $550 (11 x $50).

But any new recurring revenue your business earns in a given month is always compounded by the recurring revenue it earned in previous months. So in February, you not only have 11 months at $50 contributing to your annual revenue, you still have January’s 12 months at $50. That means that, as of February, your annual revenue is now comprised of 12+11 billing months at $50, or 23 x $50 = $1150.

Continue these calculations through the end of December, and you’ll soon discover that your calendar or fiscal year actually contains 12+11+10+9+8+7+6+5+4+3+2+1 = 78 billing months! Apply the Rule of 78 to our example above and it tells you that selling a single, $50 recurring membership fee each month translates into 78 x $50, or $3900 worth of revenue for that particular product at the end of the year.

And that’s why “78” is the magic number when it comes to harnessing the relationship between recurring sales and annual income goals.

The Rule of 78 and Your Revenue

The Rule of 78 may be an intriguing equation, but the real question is: how can it help your business?

Well for starters, with 12 full months of active billing on the horizon, it’s clear that January recurring sales are far more valuable than sales made during other months of the year (January sales are literally worth twice as much as July sales, for example – just do the math). So if you’ve been planning a big subscription push, you might want to consider firing up that promotion as early in the new year as possible.

But as we mentioned earlier, where the Rule of 78 really shines is as a tool for forecasting revenue and generating sales targets – especially for well-defined income categories.

Forecasting Revenue

To get a rough idea of your annual revenue potential for a certain product or service, simply multiply the amount of new recurring sales you expect to generate from that item each month by 78.

Generating Sales Targets

Conversely, if your goal is to reach a certain level of annual revenue from a certain product or service, simply divide that amount by 78 to discover how much your business will need to generate in new recurring sales each month to reach your objective.

For example, if your revenue goal for a specific subscription service is $60,000 this year, you’ll need to achieve a minimum of $769 in new subscription sales every month from January through December to meet that goal ($60,000 ÷ 78 = $769).

There are many ways to create recurring revenue inside a business, and some companies will experience better growth when they combine recurring and non-recurring sales. But if this is an income area you’ve yet to explore, you may want to seek help from a planning professional before applying the Rule of 78 to your particular business model.

Topics: revenue streams, Financial Forecasting, Business Budgeting, Sales, Small Business Sales