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 falls off. Though some types of businesses have a clearer path to expanding their income streams then others, with a little creativity you can identify new sources of revenue that 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 fall into the category of 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 income generated by the book’s sales after publication are passive. They go on without the author lifting a finger, with income 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 type of business can create new sources of revenue. A dog grooming salon can start to sell dog toys, or clothes, or food. Supermarkets can add pharmacies, hair salons can add spa services like massage and skin care. Many retailers have created online stores that sell their products.
One of the most famous examples of income stream diversification can be seen in Sir Richard Branson’s iconic Virgin brand. 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. Even people who feel limited by being skilled in a specific industry, like plumbers or electricians, can generate additional revenue streams by making videos of themselves teaching basic home repair skills and uploading them for monetization on YouTube, or offering to teach classes at the local high school or at 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 extremely 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 payments that are distributed 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 a higher price that you sell it for. 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, but 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 that it is used. 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 and authors when their music is played or their 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, and you aren’t going to be able to 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 so that you can 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.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax advisor.