When you're working for a company, it's important to prioritize the organization's finances so they can budget their money wisely. Thus, it's key to be mindful of your residual income because this figure can determine how much money is remaining after making all their payments and if the organization needs to cut back on expenses. Knowing your residual income puts you in the position to set attainable goals for your business and to achieve them.

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In this article, we discuss what residual income is, how it differs from passive income, the types of residual income and how to create it.

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A company's residual income is the leftover capital after they have completed all their financial obligations. It's utilized to find out the performance of a business, department or investments they make. Residual income is calculated by subtracting operating income by the sum of operating assets and required returns.

Overall, the more residual income you have, the more financial freedom you have to scale your business and make choices that benefit internal and external stakeholders, such as investors or employees. It also gives companies the chance to evaluate their key performance indicators to see if they need to be altered to track the success of the company.

Read more: Using Key Performance Indicators (KPIs) to Achieve Goals


Residual income and passive income are seen as the same for businesses and individuals. However, there is one key difference between these concepts: Residual income, by definition, is not a type of income earned by an organization. Passive income alludes to the possession of capital earned by a company with little effort required to get it. Residual income refers to the calculation of a company's financial performance to see if they're paying the bills to operate and track how much money they have leftover that they can then use to improve the organization.


A residual income is conducive for a continuous improvement strategy because residual income helps you free up time to strategize how to expand your business. The following are different types of residual income that can be a part of a company's financial obligations:


Real estate investing: Purchasing a rental property is a type of residual income because you're doing all the work upfront. After you fill out the paperwork for the lease, then the property is yours and you don't have to make monthly rent payments. If you rent out the property to tenants, you can accrue income each month with the rent payments you charge for the property. You can also invest a certain amount on a property and become an owner once it's fully funded. This way, you can budget your investment and make plans to finance it in the meantime so your company can still be solvent.Stocks: The stock market provides a lot of opportunities for you because you can make investments and profit for your company and report the stock as equity in your financial statement. The more money you make from an investment, the more residual income you'll possess. Index funds can give you multiple investments in stocks, and your profit can accumulate without additional effort provided on your end.Bonds: Bonds help you have ownership of loans taken out by companies and governments. Investors receive fixed-rate interest payments about twice a year. Once the loan matures, then you can reinvest in other bonds to have consistent cash flow coming in and out of the business as long as you don't default on the loan. However, you're still making money by not directly putting in the effort at each step of the process.Royalties: If you write a book, direct a movie or publish a song, then you can get royalties for each time someone purchases a book, a movie ticket or if someone listens to a song. The amount you receive in royalties is what you receive after you do the work necessary for it to be on display.

Review these steps for creating residual income and use it to your advantage:

1. Review your balance sheet to see financial results

2. See if your profits result from active income

3. See if your profits result from residual income

4. Try different methods


Your balance sheet determines the available assets you have left once you subtract your liabilities from your equity. Once you find out the assets you have, you can determine the financial state of your business and how your company is earning its assets. This step needs to be taken before you adjust the procedures in earning money, so you know where you can improve financially.


Active income is the income you earn by participating in each step of the process necessary to make money from a service provided. Wages and salaries of employees can reflect the amount of active income your business has. If your business solely generates income from active income, then residual income measures need to be taken to increase your profits.


Review the examples above to see if you've used them to produce income for your business. Larger businesses or corporations normally invest in stocks, bonds and real estate investments beneficial to their financial health, whereas small businesses tend to be more selective in their investment strategy.

Also, creative individuals may be working on their own to get their artwork published and receive royalties for it. For example, musicians can sign with record companies, who get royalties from the music they promote on behalf of the musician.


Once you evaluate how you obtain profits, try different methods to earn residual income that can increase your earnings. Some ideas include:


Working with influencers: Influencers on blogs and social media can promote your product on their website by rendering a link within their platform. While these influencers receive a cut of the revenue you receive, it can be beneficial if they drive more sales to your product. Also, promoting your product via ads or an email can be an alternative option to bring traffic to your product.Selling products online: Depending on the type of business you have, you may be able to sell your product through online avenues at little cost. This is recommended if you have a simple product that requires minimal research and development to create the product or market it.Building and designing an app: If you have the budget, hire a designer or a coder to build an app that can allow customers to use and purchase your product from their smartphone. You can also place ads and relevant stats that can bring even more exposure to your product and lead customers to buy other products you offer.Starting a podcast: A podcast is a great avenue for you to tell your company's story and promote your product. The podcast should give industry insights and establish thought leadership, which enhances your chances of accruing more profits for your business. It can be perceived as an active income effort at first, but the revenue you gain can help you prepare your business for its financial outlook in the future.
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