Quality of Earnings Reports: Differentiating Recurring Revenue

When you’re evaluating a company for investment, acquisition, or even internal planning, it’s not enough to simply look at the top-line numbers. You need to know what’s behind those numbers. This is where a quality of earnings report comes in. It digs into the financials to reveal which revenues are sustainable and which ones might be one-off or seasonal. For investors, lenders, and business owners alike, understanding the distinction between recurring vs non-recurring revenue is critical to making informed decisions.

In this blog, we’ll explain what a quality of earnings report is, why it matters, and how CPA Outsourcing Services can help your business produce investor-ready financials that clearly show the difference between recurring and non-recurring revenues.

What Is a Quality of Earnings Report?

A quality of earnings report (often abbreviated “QoE report”) is a detailed financial analysis prepared by independent accountants—usually as part of a transaction like a merger, acquisition, or major investment. Unlike a simple audit, which checks whether the numbers are reported correctly under accounting standards, a QoE report goes further. It evaluates whether those earnings are sustainable and repeatable.

Think of it like buying a house: an inspection tells you whether the structure is sound, but a QoE report is more like learning whether the property’s rental income will continue after you buy it.

For example, if a tech startup reports $5 million in revenue for the year, but $3 million of that comes from a one-time government grant, the QoE will show that only $2 million is recurring vs non-recurring revenue. That matters to any investor projecting future cash flows.

Why Differentiating Recurring vs Non-Recurring Revenue Matters

For anyone reading a quality of earnings report, the heart of the analysis is distinguishing recurring vs non-recurring revenue:

• Recurring revenue: income that will likely continue in future periods—such as subscription fees, maintenance contracts, or ongoing service retainers.
• Non-recurring revenue: one-time events—like a lawsuit settlement, a large asset sale, or a big but unsustainable promotional deal.

If you’re an investor, you care about the former. If you’re a seller, you want to highlight your stable, predictable streams to command a higher valuation. Without a QoE report breaking down recurring vs non-recurring revenue, you could either overpay for a business or undersell your own.

Key Components of a Quality of Earnings Report

At CPA Outsourcing Services, we prepare quality of earnings reports that are not only thorough but also understandable to non-finance professionals. A typical report includes:

1. Normalized EBITDA Analysis

We adjust earnings before interest, taxes, depreciation, and amortization to remove one-time or unusual items. This paints a clearer picture of ongoing profitability and directly supports the analysis of recurring vs non-recurring revenue.

2. Revenue Trend Analysis

We don’t just take the past year’s numbers at face value. We examine several periods to see if revenue streams are growing, shrinking, or fluctuating seasonally. This helps investors and owners alike forecast future performance.

3. Customer & Contract Review

Recurring revenue often hinges on contracts or long-term relationships. We look at top customers, renewal rates, and contract terms to determine whether revenue is truly recurring.

4. Working Capital and Cash Flow

Even if earnings look strong, poor cash conversion can be a red flag. A QoE report also analyzes working capital and cash flow trends to assess the quality of earnings.

Examples from the US B2B Market

Let’s make this concrete. Suppose a mid-sized SaaS company in Texas shows $10 million in annual revenue. A QoE report reveals:

• $7 million comes from monthly subscriptions with high renewal rates (recurring revenue).
• $2 million from a one-time consulting project for a government agency (non-recurring).
• $1 million from a promotional bundle that won’t be repeated next year (non-recurring).

This breakdown tells potential investors the true base level of earnings—$7 million—that can be used for forecasting and valuation. Without this clarity, the buyer might assume $10 million is the sustainable figure and overpay.

How a Quality of Earnings Report Benefits Both Buyers and Sellers

For Buyers and Investors

• Reduces risk of overvaluation by clarifying recurring vs non-recurring revenue.
• Supports more accurate financial modeling.
• Improves confidence when presenting to lenders or co-investors.

For Sellers

• Positions the company attractively by emphasizing sustainable earnings.
• Shortens due diligence because much of the work is done upfront.
• Helps justify a higher price based on stable, predictable cash flows.

Integrated With Broader Financial Services

Our team doesn’t just deliver a quality of earnings report in isolation. We integrate this work with other financial planning tools—like 3-statement models, budget forecasts, and outsourced CFO services—to give you a 360-degree view of your company’s financial health. This means when we separate recurring vs non-recurring revenue, we also tie that insight into cash flow forecasting and valuation support.

Why Use CPA Outsourcing Services

Preparing a robust quality of earnings report requires both technical expertise and a clear understanding of how US investors think. CPA Outsourcing Services has supported numerous small, medium, and large corporations across different industries. We’ve helped SaaS firms highlight their predictable subscription income, manufacturers clarify seasonal spikes, and professional service firms present retainer revenue versus ad-hoc projects.

Because we also provide outsourced accounting and CFO services, we understand your day-to-day operations. This lets us craft reports that speak the language of both finance professionals and business owners. Our process ensures your recurring vs non-recurring revenue is clearly differentiated, giving stakeholders a true picture of your business’s earning power.

Conclusion

If you’re preparing for an acquisition, seeking investment, or simply want to understand your own numbers better, a quality of earnings report is essential. It goes beyond the surface to show which earnings are built to last. And by distinguishing recurring vs non-recurring revenue, you give investors—and yourself—the clarity needed to make smarter decisions.

At CPA Outsourcing Services, we make the process straightforward and collaborative, turning complex financial data into actionable insight.