Operating revenue consists of all the money your small business brings in with its main streams of income. Simply put, it's the same as your sales. Understanding the ins and outs of your company's operating revenue can help you take the right steps to improve this key metric of success.
What Is Operating Revenue?
All revenue your business brings in from its regular money-making activities is considered operating revenue. This category does not include revenue sources that occur sporadically outside the scope of your core product or service lines.
How Do You Calculate Operating Revenue?
Follow these steps to calculate your company's operating revenue:
- Determine gross sales for the period in question, including all credit card and cash transactions. Do not include promotional or complementary products in this revenue calculation.
- Find the amount of revenue generated by allowed sales. Divide your allowed sales by total sales to find out how much you earned from returned items.
- Decrease the calculation by the variable cost of goods sold. This describes the changes in the cost of goods sold based on business volume.
What's the Difference Between Operating Revenue and Non-Operating Revenue?
Operating revenue comes from your company's primary business activities. If you have an ecommerce company, selling products and services online generates this type of revenue.
On the other hand, your business derives non-operating revenue from one-time or uncommon events. For example, a cash infusion from an investor provides valuable funds but it's considered non-operating revenue since it's not a regular income source. Other types of non-operating revenue may include:
- Money the company gets from a legal settlement
- Income that comes from business investments
- Income derived from interest received
- The sale of business asset like real estate, vehicles, or equipment
Why Is It Important to Understand Operating Revenue?
You can look at your operating revenue to see how your business has increased from one quarter or year to the next. This provides a reliable measure of the health of your business.
If you've run into difficult times, you can review operating revenue to see whether your business suffers from decreased sales, reduced profit margins, or both. Having enough operating revenue to cover your business expenses ensures you don't have to seek outside funding sources like loans.
If you begin to sell stock in your company to generate income, the business's operating revenue is used to derive the expected earnings per share (EPS). This important metric reflects the amount investors will likely earn from putting money into a specific company.
Operating Revenue Examples
Examples of operating revenue include:
- Merchandise sales for a brick-and-mortar or ecommerce retail business
- Revenue from provision of services
- Subscription sales for a software-as-a-service business
- Donor contributions for a nonprofit organization
- Operating grants for government agencies and nonprofit organizations
While each of these groups may bring in other sources of revenue, these non-regular sources fall outside the category of regular business activities and do not constitute operating revenue. For example, if a nonprofit organization sells tote bags and stickers to support its cause, they're making extra money but it's not operating revenue.
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The Bottom Line
Operating revenue includes all the funds your company counts on for regular income. If an influx of money comes from an activity that doesn't occur regularly and/or falls outside your main business activities, it's considered non-operating revenue.
Understanding your company's operating revenue can guide smart financial decisions and illuminate the overall health of your business.
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