Without an income stream, your business is at risk of failure. Many small businesses have a single income stream, such as an electrician or plumber. Having multiple streams of income is a good way of safeguarding your business against a downturn in one particular stream. It can give your business stability and the opportunity to grow.
7 different types of income streams
April 10, 2022
If you are a tradesperson, such as an electrician, it may be challenging to figure out how you can generate multiple streams of income. Hopefully, reading this short article will give you some ideas on different income streams.
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Active and passive income streams
There are two types of income streams, active and passive. Your business is most likely using an active income stream. This is where you do some work or provide a service, and someone pays you for it. Very simple and a direct connection between the work and payment.
Passive income is where the income is not directly tied to the work you do. Don’t be fooled. Although it says passive income, there is still work required to generate the revenue. It doesn’t come for free. In general, the work needed for a passive income stream takes place early on, and the income comes later.
An excellent example of this is an online store. The work at the beginning is to build the website, upload your products, and then promote them. The passive income comes later as people begin to buy products from your store. It’s passive, as people can even buy products when you are asleep!
Big business has been diversifying its income streams for centuries. They expand their business operations into different sectors to generate new streams of income. Almost any company can diversify. A flower shop can develop a separate wedding flower business, for example, or offer mail orders. The most potent diversification is into a completely new business sector. But that takes a lot of effort and expense.
An excellent study of a company that has grown and diversified is the Virgin Group. Initially started by Sir Richard Branson as a record label, Virgin has since expanded into aviation, holidays, mobile telephony, and much more.
An example of a good way for an electrician to find other streams of income is to work with property management companies. His core business may currently be private homeowners, but management companies often need additional tradespeople. Another route could be to start offering courses to people on basic electrics and how to stay safe with electricity.
Aside from diversification, there are other ways to generate income known as the seven streams of income;
- Earned Income
- Profit Income
- Interest Income
- Dividend Income
- Rental Income
- Capital Gains Income
- Royalty Income
Many of these are not available to everyone. You need to have money already to benefit from some of these income streams.
Earned income is your primary income stream through a job. The majority of us start here, and many go no further. For most, earned income is very limiting and has attracted the acronym, Just Over Broke!
In other words, you earn just enough to survive. Of course, some jobs pay exceptionally well, but these are exceptions, not the norm. To go beyond a job and start your own business requires taking risks and moving into profit income.
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By selling a service or product for more than they cost, you use the basis of profit income. You could open a retail store and sell products, offer professional services and charge for your time, or combine the two.
It is one of the hardest steps to move from earned income to profit income, but it is the dream of many employees. Becoming self-employed or an entrepreneur can be a difficult road, and there are risks.
If you or your business has spare cash sitting in the bank account, it is losing money. There are many ways you can put your money to work and earn a passive income stream.
Maybe invest it in a savings scheme and use the power of compound interest to gain a passive income. Buying government bonds is another safe investment that will generate interest.
When you buy shares in a company, you become part-owner of that company and entitled to dividend payments. Well-timed investments in companies can generate excellent passive income streams.
Property investment is an excellent way of protecting your money and generating an income from rent. There are two downsides to this income stream. First, it requires a substantial investment initially, unless it is part of an investment scheme. Second, releasing the cash can be time-consuming and costly, so if you may need the money quickly, this is not for you.
Capital Gains Income
Buying and selling assets can provide you with an income known as capital gains. For example, if you buy stocks and shares worth $100 and then sell them on for $120, the capital gain is $20.
It is essential to consult an accountant first about capital gains, as each country has different rules. Depending on the asset sold, the capital gains tax may wipe out all of your profit.
This is a passive income stream generated by designing, building, or making something unique and charging people and businesses to use it. Musicians are a prime example. In most cases, musicians are signed to a particular label, such as Virgin Records. The record company pays to record the musicians, produce the records, market them, and sell them.
The musicians receive a royalty payment for every album sold and every time it is played to the public. Famous musicians, such as Elton John, make millions from the royalties for playing his music.
- Income streams are a necessary part of running your business
- Diversifying your income streams will improve cash flow
- Companies do this by beginning with one product and expanding to other areas, such as Virgin
- Understanding the different types of income will help you diversify your income streams effectively