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Operating revenue definition
Operating revenue is the total cash inflow from your primary income-generating activity or activities. You might already be familiar with operating revenue, but just know it by a simpler name: sales.
When you first start your business, you will probably only have one or two income-generating activities that are directly related to the sale of your product or the delivery of your service. As your business grows, you may develop other income-generating activities, but not all money coming into your business is considered revenue.
Plus, the inflow that is revenue takes several different forms. It’s important to understand how each type of revenue impacts your business accounting and financial statements. Understanding this metric allows you to make year-over-year comparisons of your income statement. At a glance, you can assess the health of your business using the metric of revenue.
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Operating revenue examples
A business might generate income through at least one of the following avenues:
Sales of merchandise.
Contributions from donors.
Providing services to customers.
Which of these channels contribute to operating revenue, however, depends on the type of business and that business’s primary income-generating activity. If you aren’t sure how to classify your various income-generating activities to properly identify your operating revenue, your business accountant or bookkeeper can help.
Here are a few operating revenue examples for various types of businesses.
For a retail business
A retail business typically will produce operating revenue from the sale of merchandise. However, that same business might occasionally bring in an outside expert to provide a workshop (service) for customers; this is common in craft and home improvement stores. Additionally, whenever the business is considering launching a new product, they might do some crowdfunding (where they solicit contributions from donors).
This retail business has three types of income, but only one — the sale of merchandise — is operating revenue.
For a nonprofit organization
A nonprofit organization often produces its operating revenue through contributions from donors. But they might also sell merchandise (like T-shirts, window decals and tote bags) to raise awareness for a particular cause. Sometimes, a nonprofit will even provide a service, like a community fair, at a reduced cost.
Like the retail business, the nonprofit organization has three types of income, but only the contributions from donors are considered operating revenue.
For a service-based business
A service-based business, like a preschool, sells services to its customers and the customers pay for those services through tuition. Like the nonprofit organization, the preschool might also sell merchandise, either to raise awareness or promote community spirit. Once a year, the preschool might also do a fundraising campaign to encourage past customers and other members of the community to contribute to the preschool’s capital fund.
In this example, the preschool has three types of income. But only the tuition from the primary service provided to its customers is considered operating revenue.
What is non-operating revenue?
Not all revenue that comes into your business is from your primary business activity or considered operating revenue. Some common types of non-operating revenue that could still impact your business’s finances include the following:
Sale of assets (buildings, vehicles, equipment, etc.).
Income from the settlement of lawsuits.
These examples of non-operating revenue have two things in common:
They are not produced from the primary business activity of the company.
They are sporadic and not expected to be part of your business’s income on a regular basis.
Non-operating revenue is also found on your profit and loss statement, typically below operating income and above net income/profit. This allows you to clearly see your business’s financial position from operating activities, prior to the impact of non-operating revenue.
Operating income vs. revenue
Operating income is not the same as operating revenue. Operating revenue is the total cash inflow from your primary income-generating activity. Operating income is the income you have after subtracting the costs of doing business.
More specifically, operating income is calculated by subtracting operating expenses, depreciation and amortization from gross profit. Operating expenses are the expenses that go into running your business: rent, administrative costs, supplies, etc. To calculate your gross profit, subtract the cost of goods sold from your revenue. Unlike net income, operating income doesn’t factor in non-operating income from, say, investments.
When you are discussing your financial statements with your accountant or bookkeeper, make sure you are clear about the terms they’re using so you’re on the same page about your business’s performance.
This article originally appeared on Fundera, a subsidiary of NerdWallet.