What is Operating Revenue?

What is the most important indication of your business if you have one? Of course, profitability is the primary objective of any business. To this, some more factors boost your profitability namely total revenue, revenue sources, and profit margin. Generating revenue and a steady stream of cash flow is always essential for a healthy business. You may wonder why operating revenue is so important. It is because it helps stakeholders in a company on crucial business decisions about its growth. If the company is not generating enough operating revenue, then the stakeholders might opt to sell it out to avoid further losses.

This article will try to explain operating revenue, how to calculate it, and examples of operating revenue for different types of businesses.

What is Operating Revenue?

What is the significance of operating revenue in a business's financial statement?

Operating revenue is created by a company’s primary business activities. It is defined as the total of your sales excluding any cost incurred in the past. If you compare it year over year for a company, then the health of the company and its operations can be assessed. For instance, say a company makes and distributes machinery parts for industrial use, so the total revenue considered will be just from producing and selling those parts. A business with high operating revenue more than its expenses makes profits. It is a vital metric for companies because it shows how much cash is made from daily business operations, especially important during difficult times.

Some examples of Operating revenue could be:

• Sales of merchandise
• Contributions from donors.
• Providing services to customers.

How is Operating revenue calculated?

Operating income is essentially calculated by taking a company's total revenue subtracted from the cost of goods sold. This is equivalent to gross income and subtracting all operating expenses. Operating income removes taxes, interest income, or expenses from investments and is used to find out the operating margin. Below are the steps you can use to calculate operating income:

Given here are three formulas that you can use to calculate operating income. One of them is a simple formula in which you can use values from a company’s financial statement to find the operating income.

Operating income = Gross income – Operating income

(Gross income is the money your business has left after subtracting the costs of producing the product. To get gross income, subtract the Cost of Goods from revenue.)

(Operating expenses include all of the costs linked with running your core business activities such as utilities, insurance, rent, and employee wages.)

The two other formulas you can use to calculate operating income: You can expand the above formula and use more values from the company. It is shown below:

Operating income = Gross income – Operating expenses – Depreciation – Amortization Opening income = Revenue – the cost of goods sold – the cost of labour – other daily expenses.

An example is shown here for a better understanding:

Let's say that you have a company that runs a cookie baking and delivery business from your home and you are planning to expand it. You are probably going to hire people to work for you. You need to take out a business loan and have to show your operating income to creditors. Your business has generated $10,000 in revenue last year. The operating expenses are in your income statement which includes:

• $12,000 in utilities

• $8,000 in insurance

• $10,000 in office and packing supplies

• $30,000 in COGs (includes labour and materials used to create the goods)

How do we calculate the gross income?

Gross income =Revenue – COGs Gross income = $100,000- $30,000 Gross income= $70,000

Now we need to calculate the operating expenses

In this example, the operating expense is $12,000 + $8000+$10,000 + $30,000

The operating income cannot be included in any extraordinary expenses such as the cost of damages etc. in the calculation of operating expenses.

To calculate Operating income the formula

Operating income =Gross income - Operating expenses

 $40,000 = $70,000 - $30,000

By showing your business had $40,000 operating income, the creditors will decide if you will get a loan or not.

What is the importance of Financial Analysis in operating revenue?

• Overall financial stability and performance of a company can be assessed
• Helps categorise strengths, weaknesses, and potential areas for improvement
• Provides insights into market conditions and economic factors affecting the company and how operating revenue is impacted by external trends
• Effective financial strategies and policies can be formulated with the help of operating revenue
• Important guidelines for decisions on budgeting, pricing, and cost management can be processed 
• All long-term business plans and growth strategies are planned with the guidance of Operating Revenue
• Supports forecast future revenue and highlights projects for investment. It also assesses the profitability and risk of new ventures

What is the impact of operating revenue on Businesses?

Operating revenue can impact the capital budgeting in the marketing and decision-making of a business. It amounts to the total amount of money you bring in for selling products and services over a set period. The total amount of money that is brought after selling products and services over a set period is the impact of the operating revenue on the business of the company. The way a business brings in revenue depends on its business model. Some possible ways to earn revenue include direct sales of goods, products, and services. Subscriptions, and licences, advertising are some recurring ways to earn revenue.

What is the difference between Operating Revenue with Other Financial Metrics?

A table can explain the difference between Operating Revenue and Other Financial Metrics like GrossProfit, Operating Profit and Net Income.

Some Common Misconceptions in Financial Metrics

Revenue vs. Profit

• Revenue: Total income generated from sales or services before any expenses are subtracted.
• Profit (Net Income): Amount left after all costs, plus operating and non-operating expenses, are deducted from revenue.

Operating Revenue vs. Non-Operating Revenue

• Operating Revenue: Income from main business activities.
• Non-Operating Revenue: Income from secondary sources like investments or asset sales.

Some Studies and Real-World Examples of Operating Revenue

A few real-world examples may give you an interesting perspective of Operating revenue.

Example 1:

In the retail industry, companies like Walmart bank on operating revenue big time which they earn from their vast network of stores to cover operating expenses and generate profit.

Example 2:

In the technology sector, Apple’s operating revenue from product sales and services influences its net income significantly, emphasising the importance of innovation and market demand.

Example 3:

 Industrial giants like General Motors too depend on operating revenue from vehicle sales to endure operations and invest in research and development.

Example 4:

Companies like Netflix experienced large growth in operating revenue as they transitioned from DVD rentals to streaming services, boosting their profitability and market presence.

Example 5:

However, companies like Nokia saw a decline in operating revenue with the rise of smartphones, leading to a major impact on their overall business performance.

Understanding operating revenue is central to business success as it directly impacts profitability and financial stability. With a firm grasp on monitoring and managing this critical metric, companies can confirm they cover operational costs, make strategic decisions, and maintain investor confidence. This helps businesses drive growth, and achieve long-term sustainability.

FAQs

1. What is the other name for operating revenue?

Ans. Operating income also referred to as operating profit or Earnings Before Interest and Taxes (EBIT) is the sum of revenue left after subtracting the operational direct and indirect costs from sales revenue.

2. What does operating revenue include?

Ans. It is the total cash inflow from your primary income-generating activity. Operating income is the income you have after deducting the costs of doing business.

3. What is the difference between operating revenue and revenue?

Ans. Revenue is the total amount of income created by a company from the sale of its goods and services before deducting any expenses. Operating income is the total of a company's profit after subtracting its regular, recurring costs and expenses.

4. What is an example of operating revenue?

Ans. Operating revenue is the revenue that a company generates from its main business activities. For example, a retailer produces its operating revenue through merchandise sales; a physician derives her operating revenue from the medical services she provides.