No matter what type of business you operate, you rely on having a predictable flow of income to keep your bills paid. Having more than one income stream is an insurance policy against economic disaster.
No matter what type of business you operate, you rely on having a predictable flow of income to keep your bills paid. If you only have a single source of income and it suddenly falters, you’re going to be in trouble. Having more than one income stream is an insurance policy against economic disaster. It provides a cushion to keep you afloat if your business suddenly endures a hardship. Some types of businesses may have a clear path to expanding their income streams. It requires little creativity to identify new sources of revenue, which can add stability, save you from a downturn, and even add to your bottom line.
The Difference Between Active and Passive Income Streams
There are several different types of income streams, all of which can be categorized as either active or passive. If you are making something, selling something, or providing a service of some kind in exchange for direct payment, that is active income. While passive income also generates revenue, the payment is not as connected to the original work. A good example of someone earning passive income would be an author’s book sales. While months or even years of work went into the book’s publication, the revenue generated by the book’s sales after publication is passive. Revenue flows in without the author lifting a finger. Income can be deposited into their bank account for years after and even following their death.
How to Add New Income Streams to your Business
Adding new income streams to your business is known as diversification, and it is not as hard as it sounds. Any business can create new sources of revenue. For example, a dog grooming salon can start selling dog toys, clothes, or food. Supermarkets can add pharmacies, hair salons, and spa services like massage and skincare. Furthermore, many retailers have created online stores that sell their products.
Sir Richard Branson’s iconic Virgin brand is seen as one of the most famous examples of income stream diversification. Though it began as a record store, the company has branched out into a wide range of products and services, including jewelry, cruises, mobile phone service, and even an airline. Though you may not dream quite as grandly as Sir Richard, you still have options available to you. People who often feel limited by being skilled in specific industries, like plumbers or electricians, can also generate additional revenue streams. Examples include making videos of themselves teaching basic home repair skills and uploading them for monetization on YouTube or offering to teach classes at local high schools or homeowners’ association meetings.
Different Income Streams
To help you identify alternative sources of income for yourself or your business, here is a list of 7 different types of income streams:
Capital Gains – This is income that comes from selling stocks and other assets at a profit. Though it is highly satisfying to buy something for a low price and sell high, the taxes on capital gains can quickly dampen your enthusiasm for this as a source of income. Capital gains are also reliant on market trends and are therefore unpredictable.
Dividends – Dividends are distributed payments to owners of shares in a company. The more shares you own and the more profitable a company is, the more dividends you are likely to receive. They can be an excellent source of passive income.
Earned Income – Earned income is the money that you make from your job. It is straightforward and active and is almost always the primary source of income.
Interest Income – This is passive income earned from investment or savings. The money that you earn in an IRA, a savings account, or by investing in bonds is interest income.
Profit Income – Profit income is active income that is the goal of all businesses. It represents the difference between the cost of selling a service or product and the higher price you set for sale. The greater your profit margin and volume, the more profit income you make.
Rental Income – If you own property that you are not using and are willing to have somebody else use the space, you can offer to rent it. Rental income represents an excellent source of passive income. Still, it requires making an initial investment in the property itself, and there are costs and tax liabilities involved.
Royalty Income – Royalty income is paid to people who create something and then get paid every time it is utilized. To earn royalty income, you need to have established your ownership rights and created a marketing plan through which you will get paid. Examples are the monies paid to musicians when their music is played or when authors' books are sold.
There’s an old adage about needing to have money to make money, and that is true of some of these—you aren’t going to be able to earn royalties if you haven’t published music or literature. Likewise, you won't earn rental income if you don’t have a property to rent. Still, it is a good idea to familiarize yourself with all of the options to keep your mind open to all of the opportunities. The more income streams you can add to your business, the less risk of financial trouble when one revenue source suffers a downturn.
If you have any questions about income streams as an individual taxpayer or business owner, please contact us.