Recurring revenue makes your company more predictable, but only as long as customers stay. A subscription for management, hosting or software brings in revenue every month without a new quote. If you have customers pay in advance, the money is in the bank sooner than with hours you invoice afterwards.
For the value of the company, what counts most is how long customers stay. Researchers who valued companies on the basis of their customers found that a small improvement in customer retention does much more for value than the same improvement in margin.
In short
- Prepaid is not yet revenue. You spread an annual subscription over the months of its term, and you already pay the VAT on the whole invoice in the return for the period of the invoice.
- Customer churn (the share of customers who cancel each year) determines how predictable revenue really is. At 10% a year, 59% of customers are left after five years, at 20% only 33%.
- In research on five companies, 1% better retention increased value by 5%, and 1% better margin by 1%. Do not treat a valuation multiple from a website as an established fact.
In this article
- What is recurring revenue at an IT company?
- What does a subscription do to your cash flow?
- Is a prepaid annual subscription already revenue?
- How predictable is subscription revenue really?
- What does churn do to the value of your company?
- How do you work out what one customer is worth?
- What should you watch for when switching from hours to subscriptions?
What is recurring revenue at an IT company?
Recurring revenue is revenue that comes in again every period under a running agreement, without a new order. At an IT company it is often management per workstation per month, hosting, a software subscription (SaaS, software the customer uses over the internet) or a maintenance contract.
The difference with hours or projects lies in the start of each month. With hours, you start at zero and have to do and sell the work first. With a subscription, part of next month's revenue is already fixed, as long as the customer does not cancel. Many IT companies use the figure MRR for this, the monthly recurring revenue: the sum of all running subscriptions in one month.
What does a subscription do to your cash flow?
That depends on when the customer pays. If you have a year paid in advance, you already have the money for twelve months of work in the first month. If you invoice monthly in arrears with a payment term, you are always a month or more behind. The same contract can thus give a very different bank balance.
Worked example, not industry figures
An IT management company signs a contract worth € 12,000 a year excluding VAT, so € 1,000 a month. With an annual invoice in advance, it receives € 12,000 in the first month. With a monthly invoice in advance, it receives € 1,000 every month. With a monthly invoice in arrears and a 30-day payment term, each amount comes in a month later. After twelve months it has then only received € 11,000. The amounts and terms are assumptions for this example.
Be careful when switching from projects to subscriptions. A project of € 36,000 that you invoice on delivery brings in that amount in one go. If you sell the same work as a subscription of € 1,000 a month over three years, the money comes in much later, while the costs of the first months are already due. Work through that transition in advance in a cash flow forecast.
Is a prepaid annual subscription already revenue?
No. In the annual accounts you spread the income over the term. The Dutch Accounting Standards say that income from a service over a period is recognised on a straight-line basis over that period, and that advance payments usually do not show how much work has been done (RJ 270, paragraph 120). In an example about SaaS, the standards treat the licence and hosting together as one service, with the income recognised pro rata over the agreed period.
The part for the coming months is on the balance sheet as a debt to the customer: you have the money, but have not yet delivered the work. How this works for a deposit is explained in is a deposit already revenue, or does it belong on the balance sheet.
For VAT, the invoice is the moment that counts. VAT becomes due when the invoice is issued, and at the latest when payment comes in (Turnover Tax Act 1968, article 13). On an annual invoice from January you therefore pay all the VAT in the return for January or the first quarter. Do not count that amount as money you are free to spend.
How predictable is subscription revenue really?
As predictable as customer churn. Churn is the share of customers who cancel in a period. At 10% a year, 59% of the original customers are left after five years. At 5% it is 77%, at 20% only 33%. If you win no new customers, recurring revenue therefore gets smaller every year.
In reality, churn is not the same every year. Researchers show that retention of a group of customers often appears to rise as that group gets older. That is not because each customer becomes more loyal, but because the customers who cancel quickly are the first to leave. Those who remain are more likely to stay (Fader & Hardie, 2007).
For your own figures, this means two things. Measure churn among new customers separately from customers who have stayed for years, because churn is often higher among new customers. And do not simply apply the churn of your first year to all the years after.
What does churn do to the value of your company?
A lot. Researchers who valued companies on the basis of their customers found that 1% better retention increased value by 5%. 1% better margin increased value by 1%, and 1% lower costs to win a customer by 0.1%. The effect of retention was almost five times as large as that of a 1% change in the rate used to discount future money (Gupta, Lehmann & Stuart, 2004).
These researchers defined the value of a customer as the expected sum of their future earnings, discounted to today. They worked with public figures from five companies, not with small IT companies. So the exact percentages do not apply one to one to your company. The direction does: the longer customers stay, the more each customer is worth.
Later researchers worked this out for subscription businesses. They valued such companies from public data on how many customers were acquired and lost, and applied their method to two American subscription businesses (McCarthy, Fader & Hardie, 2017). A buyer of your company will therefore want to see how many customers you win, how many cancel and what each customer brings in.
Websites often show a fixed multiple by which subscription revenue is multiplied to arrive at a company value. Such a multiple is not an established fact and does not automatically apply to a small Dutch IT company. What generally determines the price on a sale is explained in what determines the value of your company on a sale.
How do you work out what one customer is worth?
Multiply the margin per customer per year by the number of years a customer stays on average. With a fixed churn, that number of years is roughly 1 divided by the churn: at 10% a year an average of 10 years, at 20% an average of 5 years. This is a simplification, because in reality churn is not fixed and money later is worth less than money now.
Worked example, not industry figures
A customer pays € 1,000 a month for IT management. After the cost of hours and licences, € 400 a month is left, so € 4,800 a year. At 10% churn a year, a customer stays 10 years on average and brings in € 48,000 of margin. If churn falls to 8%, they stay 12.5 years on average and bring in € 60,000, a quarter more. To achieve the same with a higher price, the margin per month would have to go from € 400 to € 500. All amounts and percentages are assumptions for this example, without discounting to today.
What should you watch for when switching from hours to subscriptions?
Set out in the contract what is included in the price and what is not. With a fixed price per month, you carry the risk that the work takes more hours than expected. Customers do value a fixed price: in research on Dutch auctions for standard legal cases, clients strongly preferred a fixed fee to an hourly rate (Felső, Onderstal & Seldeslachts, 2022).
Also agree a term, a notice period and an annual price adjustment. Without an adjustment, your margin shrinks every year as wages rise. You can link the adjustment to a public index, such as the CBS service price index for computer programming and consultancy. In the second quarter of 2026 it stood at 115.8, with 2021 as 100 (CBS, service prices, commercial services).
After that, track a few figures every month: MRR, the number of cancellations, the margin per customer and the amount received in advance but not yet earned. That last figure is money in the bank that still requires work. Together they show whether recurring revenue is growing, and whether cash flow stays in order if a few customers cancel at once.
Sources
- Dutch Accounting Standards Board (Raad voor de Jaarverslaggeving), Guideline 270 The profit and loss account (amended 2021), RJ-Uiting 2020-15 annex 2, paragraph 120 and SaaS example, December 2020. rjnet.nl
- Turnover Tax Act 1968 (Wet op de omzetbelasting 1968), article 13, in force from 1 January 2026, accessed 31 October 2026. wetten.overheid.nl
- Fader, P. S. & Hardie, B. G. S. (2007). How to project customer retention. Journal of Interactive Marketing, 21(1), 76-90. doi.org
- Gupta, S., Lehmann, D. R. & Stuart, J. A. (2004). Valuing customers. Journal of Marketing Research, 41(1), 7-18. doi.org
- McCarthy, D. M., Fader, P. S. & Hardie, B. G. S. (2017). Valuing subscription-based businesses using publicly disclosed customer data. Journal of Marketing, 81(1), 17-35. doi.org
- Felső, F., Onderstal, S. & Seldeslachts, J. (2022). The pricing structure of legal services: Do lawyers offer what clients want? Review of Industrial Organization, 61(2), 123-148. doi.org
- CBS, Dienstenprijzen, commerciële dienstverlening en transport (Service prices, commercial services and transport, index 2021=100, table 85817NED), CPA 62 Computer programming, consultancy, updated 4 September 2026, accessed 31 October 2026. cbs.nl