Whether you’re a novice or a serial entrepreneur, most small business owners welcome the opportunity to expand their companies with multiple revenue streams. However, despite understanding the concept fully, it can be challenging to implement and monetize. Thankfully, the Rule of 78 is there to help you transform your business goals into the multi-pronged system you want and need.
What is the Rule of 78?
A mathematical equation often used to develop a business’s recurring billing options and expand their enterprise, the Rule of 78 is a misunderstood tool that entrepreneurs employ to take their companies to the next level.
In short, the Rule of 78 demonstrates how much your company will generate in recurring sales each month if you sell a consistent amount throughout the year, then it uses that information to determine how much revenue you will earn for the entire year, as well as how your monthly recurring billing will increase as the year continues.
Based on an individual salesperson’s activity, the equation allows you to estimate how much revenue to set as a target each month in order to achieve the goals you’ve made for the fiscal or calendar year. It’s called the Rule of 78 because, essentially, you multiply the new revenue your company generates in projected recurring sales each month by 78. This will give you the total revenue you’ll earn for the year.
But Why Do You Use 78 in Your Calculations?
Although there are only 12 months in a year, the equation uses the number 78 because the assumption is that each month’s new revenue will be in your company’s accounts for the remainder of that fiscal or calendar year.
So if you generate $100 of new sales revenue in January, the assumption is that you will have that $100 of recurring sales revenue for the remaining 11 months of the year. Then, if you generate $100 of new revenue for February, you will count that new $100 in your account as a recurring sale for the remaining ten months of the year. And so on.
In addition to the new revenue you’re acquiring each month, you’re also reaping the benefits of the revenue you earned in recurring sales in previous months. This leaves you with 78 months worth of revenue by year’s end.
How the Rule of 78 Can Help Your Business
As you begin each fiscal or calendar year, the Rule of 78 can help you estimate how much sales revenue you need to earn each month to meet your goals. If your goal is to make $100,000 gross revenue for your business, the Rule of 78 will tell you that you need to generate approximately $1,282.10 in new recurring sales each month.
Therefore, in January, you should earn $1,282.10 in recurring sales. Then, in February, you maintain the recurring sales revenue from the clients who signed on in January, as well as seek out new clients to generate a $1,282.10 in recurring sales for the new month.
With this information, a small business owner interested in expanding their company or simply calculate ways to improve financial stability can brainstorm new ideas for recurring revenue streams that will become sources of guaranteed sales each month. If you’re an entrepreneur just starting out or someone who operates your business as a side hustle, but you’re looking to go full-time, the Rule of 78 can be an invaluable tool used to help you calculate how to get there.
For example, if you’re a graphic designer who hopes to move away from the “feast or famine” model that plagues many micro business owners, the Rule of 78 can walk you through a mathematical process to help you determine how much money you need to generate in recurring sales each month to guarantee financial stability. Once you arrive at your sales revenue goal, then you can explore avenues on how to generate those recurring sales.
Caveats to the Rule of 78
Regardless of how you decide to generate recurring sales each month, it’s important to remember that businesses often grow through a combination of recurring revenue and non-recurring revenue.
Returning to our previous example, if you’re a graphic designer looking to expand your enterprise using the Rule of 78, creating a monthly newsletter for local area businesses could be a possible recurring revenue stream for you. But it’s important to remain open to new clients interested in your services on a one-time or non-recurring basis (e.g., to redesign a new website).
Balancing multiple revenue streams can be difficult, especially if you’re not accustomed to recurring sales in your business model. It’s best to review all aspects of your company before applying the Rule of 78 to your annual business plan. Once you’ve examined the right target to achieve your goals, then the Rule of 78 can help illustrate the most practical means to reach it.