What is operating revenue? Definition, formula & real-world examples

ProfitWell Aug 28 2021

For business owners, profitability is the primary objective. Different factors such as total revenue, revenue sources, and profit margin, among others, contribute. As such, generating revenues and having good cash flows is essential. 

But what exactly is revenue? 

Easy, right? It's the amount of money coming into your business. Well, that's not an accurate revenue definition. Not all money flowing into your business counts as revenue, and there are different types of revenue. A crucial element of running a company successfully is understanding the different types of revenue. Moreover, you should know how each impacts your financial statements. 

In this article, you'll learn about operating revenue in particular, how to calculate it, and examples of operating revenue for different types of businesses. 

 

What is operating revenue? 

Operating revenue refers to the money a company generates from its primary business activities. It is often reported on the income statement, and you'll find it in the top-left of the balance sheet as well. Operating revenue is a vital metric for companies because it indicates how much cash is generated from day-to-day business operations. This is especially important during difficult times.

Operating vs. non-operating revenue

Operating revenue and non-operating revenue are often wrongly referred to as something similar. Non-operating revenue refers to earnings that are generated from sources other than core operations. In many cases it involves the sale of assets.

For example, a company may sell real estate or intellectual property for cash. These types of sales don't impact day-to-day business activity and aren't included in operating revenue since they aren't generated from the company's core operations.

Why it's important to understand operating revenue

Since operating revenue focuses on inflows from your key operating activities, it's a crucial metric to track. It gives you a clear view of the state of your core business. 

If your core business has been struggling, monitoring operating revenue will help. With the data you will understand the cause, as it shows whether there's an issue with sales or a decline in margins. Due to the impact that it can have on your success, it's essential to track it separately from other revenue forms. 

How to calculate operating revenue

Calculating operating revenue is straightforward. You'll need to:

  • Calculate gross sales- First, you need to add all the totals of your top-line revenue, including cash and credit card receipts. However, some items shouldn't be included in your calculations. If you've provided a free service or product as part of a promotion, you should deduct the value of this campaign from gross sales. 

  • Subtract returns and allowances- Allowed sales that are then returned will impact your revenues significantly. As such, it's important to calculate them carefully in order to determine your true operating revenue. To do so, take the total amount of allowed sales and divide it by your total sales. Essentially, this is the amount of revenue you generated from allowed sales. 

  • Subtract variable costs of goods sold (VCOGS)-Variable costs are those that rise or fall in direct proportion to the volume of business activity.

The difference between operating revenue vs. operating income

Whereas operating revenue and operating income may sound similar, they measure different things in the business. 

Operating revenue gives you information about the company's core operations and how this is impacting your success. In contrast, operating income focuses on gains made from operational activities, net of all operating expenses. Of importance to note is that these two are also different from net income, also known as the bottom line, which accounts for operating income less non-operating expenses.

It's not always a good idea to compare the two, as they're derived from different calculations, and both are impacted by various factors. For example, if your gross margin is increasing, then this will likely have an impact on operating income, but it may not have any effect on operating revenue.

If you do need to compare the two figures, it's best to compare operating income on a per-share basis. That way, you can see how much each unit is contributing to your success.

Operating revenue examples by industry

Although operating revenue is present in all industries, there are slight variations. Here's how it presents itself for different types of businesses.

In SaaS

For SaaS companies, operating revenue is driven by the number of subscriptions. A SaaS company typically calculates operating revenue by multiplying its average subscription price per customer by its total subscriber count.

If you have a lot of new subscribers in one quarter—even if this creates growth—and then lose them all at once, it won't reflect on operating revenue. This is because it only shows the numbers from your core operations.

In retail and consumer goods

For retailers and small businesses, operating revenue is far simpler to calculate. It's simply the gross sales minus returns. 

For CPG (consumer package goods) companies, operating revenue represents new product sales plus add-on sales (like accessories or higher-margin products). 

They can also derive an operating revenue figure from service revenues (through a multiple of service fees earned).

Non-profits

Though there are variations across non-profit industries, operating revenue is generally made up of contributions and grants received. For non-profits that generate income through selling products or services, operating revenues will also include those same elements.

In the service industry

The service industry is incredibly varied. Companies in this sector will generate millions of dollars in revenue each year, working on a number of different projects. 

This makes it incredibly difficult to calculate an operating revenue figure given the vast array of services—ranging from very high-value workloads to smaller jobs that may be spread over a longer period of time.

If you're in the service industry, there is a way to measure your operating revenue, but it requires a bit more work. First, calculate your total revenue for the year—typically using your income statement or balance sheet (which will help you to understand how much revenue has been generated from each job).

Now that you've got the total revenue figure, subtract your cost of services to arrive at the actual operating revenue.

Recognize & track operating revenue with ProfitWell Recognize

Evidently, calculating operating revenue is essential. However, it's not just about that, but also drawing actionable insight from the calculation. In this regard, ProfitWell Recognize is an invaluable resource. 

It's a revenue recognition tool that makes calculating operating revenue much easier. Some of its key features include:

  • Accurate revenue recognition- This tool is designed to help you accurately recognize revenue. It removes the manual steps associated with job costing and integrates seamlessly with your accounting software. This way, you can reduce errors and speed up the time it takes to book revenue. 

  • Simplified reporting- It makes reporting much easier. Not only does it provide a fully automated income statement, but it also allows you to segment revenue by job type. This way, you can easily track your operating revenue and assess the health of your business at any given point in time.

  • Minimized human error- Human error is one of the leading causes of revenue recognition errors, which can be costly. This tool makes it easy to ensure your financial data is entered correctly and in a timely manner, thereby minimizing chances for human error.

  • Geographical reporting- This tool allows you to build customized revenue recognition policies for each country and then track them. For example, you might have a global policy, but certain countries require different methods of revenue recognition. This way, multi-country management is made easy.

  • Currency reporting- You can track revenue in local currencies, making it easier to manage finances across the globe.

  • Tax reports- You can easily track taxes paid on revenue, just like you would a balance sheet account. This way, you don't need to manually add tax information to your financial statements, and it also makes it easier to manage payroll withholding.

  • Easy integration- For most businesses, accounting goes hand-in-hand with their other systems. This tool integrates seamlessly with accounting software such as FreshBooks, Xero, and Quickbooks to minimize disruption while running your business.

Schedule a demo today to add your company to the growing list of successful companies that already use ProfitWell Recognize. 

 

Operating revenue FAQs

Do you feel confident about your knowledge of operating revenue? If not, here are the answers to some of the frequently asked questions. 

Where do you find operating revenue in your financial statements?

If you're looking at your income statement, you will find operating revenue under revenues.

Is operating revenue the same as total revenue?

They're similar but not the same. Operating revenue is expressed as the total of your sales excluding any one-time costs such as items purchased for resale. Total revenues, on the other hand, also include all one-time costs and this makes it a more meaningful statistic to calculate your business growth (or decline).

What is net operating revenue?

This is the amount of revenue after operating expenses, depreciation, and amortization have been subtracted.

How do you calculate operating income?

To calculate operating income, simply subtract the cost of doing business from operating revenue.

What is operating revenue turnover?

Operating revenue turnover measures how efficiently a business is generating revenue. It compares operating income over the course of a year to total sales for that same time period.

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