A Complete Guide to Operating Revenue (Types and Examples)
By Indeed Editorial Team
Published May 31, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
A business can have many streams of income that contribute to its total or gross revenue. By monitoring its operating revenue, also known as operations revenue, a company can determine its total earnings from its primary business activities and possibly improve any unprofitable areas. Understanding what is and what isn't operations revenue, and how it contributes to the financial health of a company, can be useful for jobs in finance, accounting, and business.
In this article, we define operations revenue, reveal its benefits, outline differences between operations revenue and operating income, compare operating and non-operations revenue, discuss its importance to businesses, and provide examples.
What is operating revenue?
Operating revenue is the income a company earns through its core business activities. Professionals may also call this type of revenue earnings before interest and taxes (EBIT) or operating profit, but they're all the same concept. A company's principal source of revenue can vary depending on its business model and the industry in which it works. For example, a dentist earns their primary revenue from doing dental work and a shoe retailer earns its operations revenue through shoe sales.
Professionals may also refer to a company's core business activities as its operating activities. A business's operating activities and resulting revenues can reveal valuable information about what a business does, how it operates to generate its income, and whether these activities are profitable.
What benefit does operations revenue provide?
Apart from being a company's primary source of income, operations revenue typically affords a business with a consistent source of working capital, sometimes called net working capital (NWC). For example, a manufacturer might earn $950,000 annually in total operations revenue. It may generate this return from making cars, which it sells to retailers.
By separating operating from non-operations revenues, a company can quickly evaluate if its operating activities generate enough profit margin to cover its expenses so it might purchase new equipment. If its capital isn't sufficient, it may decide to raise its selling price to retailers.
Operations revenue is like the barometer of a company because it can measure the organization's productivity from month-to-month or yearly. Larger companies may have in-house accountants to manage their finances. Accountants can provide senior management with various financial statements, which include an income statement that shows the total operations revenue. A smaller business might use bookkeeping software to track and manage its revenue and expenses.
What is the difference between operations revenue and operating income?
While both are forms of income, they're different based on what they represent. Operating income refers to the amount left after deducting all related operating expenses, excluding interest and taxes. These expenses are simply the direct and indirect expenses required to operate the business, like rent, office supplies, and marketing.
Professionals usually refer to operations revenue as top-line revenue because typically they can find it at the top of an income statement before deducting expenses. Operations income is the portion of income left after deducting usual expenses, so it's net profits or bottom-line income and appears closer to the bottom of the income statement. By measuring the percentage difference between operations revenue and operating income, an accountant can determine a company's profit margin. The following formula shows how to determine profit margin:
Profit margin = (net income / revenue) x 100
Comparing operating and non-operating revenues
While operating and non-operations revenues are both important factors in determining a company's total revenue, they're typically different in several ways. A company often measures its operations revenue first to determine whether its primary activities bring in enough revenue to cover its expenses. Here are some more key differences between the two types of revenue:
Revenues from operations cover only those that are from the principal functions of a business. It excludes any other type of income, such as investment income, capital gains from the sale of equipment, or money generated through fundraising. Accountants typically list operations revenue before non-operations revenue on an income statement. This separates the two types of revenue and also allows someone reading the statement to determine quickly whether a business is producing enough income or its operations can cover its liabilities.
Operations revenue is typically the more dependable source of income for a business because it's the income it earns from its primary operations. Non-operations revenue is typically less routine and may occur only once. For example, a delivery company sells an asset, like one of its company cars or a clothing manufacturer liquidates an older machine. The revenue generated by these sales is non-operations revenue because they're not from the company's primary operations and typically occur once.
Income generated through primary operations allows a business to forecast what income might be available to it in the future. Knowing this information can make planning for activities like an advertising campaign easier because management knows what monies are likely available throughout the year. Revenue from operations income establishes a standard income for a company. Non-operations revenue is infrequent and unreliable as a revenue source, but it may provide a company with extra cash flow it can use to pay down a loan, for example.
Operations revenue examples
There are many types of operations revenues simply because there are many types of businesses. A business may have several types of operations revenue, such as sales from running shoes for a shoe manufacturer. Here are some common examples:
Retail goods and services: The total income a business produces from selling material goods or offering a service is its operation revenue. For example, a jeweller might measure its operations revenue through jewellery sales, custom designs, jewellery repair, and cleaning as a part of its principal operating activities.
Wholesale goods: A company may sell its product directly to other companies. The sales from this activity are its operations revenue, such as a clothing manufacturer that sells women's clothing to various retailers.
Service charges: Examples can include revenues from a bicycle repair shop that typically charges customers service fees for repairs, parts, labour, and shipping fees for parts. Together, these income streams determine its total operations revenue.
Consultations: If a company offers consultation services as part of its core business operations, it can include these in its operations revenue calculations. For example, a marketing agency might generate its total operations revenue from its marketing consultations and services.
Non-operating revenue examples
Like operations revenue, there are many types of non-operations revenue streams. This can include a one time payment from a fundraiser, for example. Here are some more examples:
Court proceeds: If a company is participating in a lawsuit, any earnings it receives from this activity are non-operations revenue because they are outside of its normal business activities. It doesn't matter if they pay in one lump sum or spread it out over monthly payments, any revenue received from this activity isn't part of the business's typical operations.
Investments: If a company holds any investments that pay dividends during the year, the business lists those earnings as non-operating income. If the company sells 100 new shares to shareholders, for example, this income is also not normal operations revenue, so the organization can list it as non-operations revenue on the company's income statement.
Insurance claims: Sometimes a business might file a claim for damages to its property. For example, if there is a fire in a clothing factory and the company files a claim with its insurance company, any proceeds are non-operations revenue.
Why is operations revenue important to businesses?
Operations revenue can reveal valuable information about a company's financial health, like where it earns the majority of its profits. This number can reveal the productivity and profitability of a firm, which is vital for most businesses because being profitable is usually an indicator of success. There are several other reasons operations revenue is important to businesses, including:
Reporting: Various provincial and federal registration, financial, and reporting agencies require a business to declare its core business activity from which it intends to earn income. If this changes, these agencies typically require the business to update this information.
Measuring: Professionals measure business growth by a company's operations revenue.
Lending: Lenders rely on a company's operations revenue to determine its risk.
Forecasting: Various stakeholders rely on operating profits as a marker of a company's ability to continue to produce overall profits in the future.
Launching: New businesses typically require operations revenues to cover expenses after startup to ensure the business remains successful long term.
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