The one thing all businesses have in common is that they need to make a profit to keep running. But with so many factors contributing to a company's financial performance, how do you determine whether you are on the right path?
Accounting gurus have long used various metrics to measure business profitability using financial statements. Tracking the business's generated revenue is one of the ways to gain insight into a company's performance.
There are several types of revenue on the income statement. In this article, we will take a look at the operating revenue, why it is essential, and how you can calculate it.
Let's get right into it!
Definition of operating revenue
The simplest way to define operating revenue is the total money that a company brings in from its core business activities. It is an essential metric of business performance that shows how much cash inflows a company generates from its day-to-day activities.
Operating revenue varies with the type of business and is, in simpler terms, known as sales. A retail store will produce operating revenue from the sale of merchandise, while an electrician will do so from the electrical services they provide.
Besides the money generated from the sale of goods and services, a company's operating revenue may also constitute contributions from donors. Again, it all depends on the primary activities of the business.
The operating revenue features on the company's income statement and is a crucial metric for investors. It is vital to determine the company's operating performance by first excluding the interest and taxes.
Examples of operating revenues
Every business across different industries has operating revenue. But, there are different types of revenue that vary from one business to another.
Let's break it down further and look at some operating revenue examples by industry.
In the Retail Sector
Operating revenue for retailers is one of the simplest ones to calculate. It is simply the gross sales minus the returns. The company can also earn service revenue through multiple service fees for its consumers.
For SaaS Companies
SaaS companies rely on subscriptions to calculate their operating revenues. Multiplying the average subscription price by the number of subscribers gives the company's operating revenue.
Variations in calculating the operating revenue are even more in the non-profit sector. However, most non-profits will consider grants and donations when calculating the operating revenue. Non-profits that offer goods or services will also include earnings from the same when determining the operating income.
Why is operating revenue important?
As we mentioned earlier, companies use different metrics to determine their performance. Operating revenue is one of the most important metrics that show the productivity and profitability of the business through its core activities.
The operating revenue of a company helps stakeholders make crucial business decisions relating to its continuity and growth. If a company is not generating enough operating revenue, the stakeholders may opt to sell out to avoid more significant losses.
Operating vs. non-operating revenue
A business may generate income from sources unrelated to core operating activities. Usually, this revenue is infrequent and unexpected. As such, it cannot be added to the business's regular income.
Sources of non-operating income include the sale of company assets, interest income, and investment income.
Key differences between operating and non-operating revenues
- Operating revenues constitute regular income for the company, while non-operating revenue is irregular and sporadic.
- Operating revenue influences the stakeholders' decisions on business continuity, but non-operating revenue has no impact on daily business decisions.
- While operating revenue informs business decisions, non-operating revenue does the same for investing decisions. For example, a company may choose to sell its property and other assets to get cash for opening another branch.
Operating revenue vs. operating income
Another common mistake is using the terms operating revenue and operating income interchangeably. Remember, revenue and profit are not the same.
Operating income, also called operating profit, is the amount of revenue left after subtracting the costs of running the business from the gross profit.
The most significant difference between the two lies in the information they represent. Operating revenue gives insight into the company's core activities and how they contribute to overall success. In contrast, operating income is the net gain from all operating activities, adjusted for the operating expenses. The latter gives more information on the company's profitability in relation to regular expenses.
Operating Revenue FAQs
Is operating revenue different from total revenue?
Although the two are similar, operating and total revenue are quite different. Operating revenue excludes one-time costs, which is not the case with total revenue. One-time costs could include the purchase of items for resale.
Is operating revenue the same as net sales?
No. Net sales (also known as net revenue) refers to the total amount of sale transactions minus returns, allowances, and discounts. On the other hand, operating revenue is what's left after subtracting operating expenses from the net sales.