The revenue earned by a company primarily from business activities is termed as operating revenue. The operating revenue is calculated on year-on-year basis to evaluate the economic health of a company. Operating revenue helps analysts paint a picture of the efficiency and profitability of a company.
Total revenue and operating revenue are two closely related terms. Often people mistake total revenue for operating revenue; however, it is essential to differentiate between the two to analyse the economic health of a company. Operating revenue helps analysts paint a picture of the efficiency and profitability of a company.
Operating revenue is accounted in the income statement. Certain companies conceal a low operating revenue with non-operating revenue in their financial statements.
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Frequently Asked Questions (FAQ)
Operating revenue can be further simplified by studying a situation where a business predominantly consists of sales related to a single contract or customer. This data needs to be broken down into several single-sourced revenues and all other revenue over a period of time. Upon doing so, it can be obtained whether the customer or contract that the business depends on indicates a declining trend of revenue. This could give rise to a big question on the sustainability of the business.
In some instances, when a business is at its transition phase, coming out of one industry and entering another, analysing the operating revenue could be a tough job. It will be challenging to determine which is the primary business activity and which revenue is to be counted. In such cases, revenue coming from both industries are considered as operating revenue. However, the one industry that the company is gradually entering into is primarily considered as the source of operating revenue.
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Non-operating revenue can be defined as the money earned by a company through activities apart from its primary objective. Such activities are not permanent and regular. Thus, it is not the primary source of money in a business organisation. For example, the revenue earned from interests, the profit gained by the sale of assets, and lawsuit proceedings are classified under non-operating revenue. Such activities do not take place regularly and are therefore not considered as operating revenue.
Any revenue earned by activities apart from its primary business operations can be regarded as non-operating revenue. However, a company needs to generate operating revenue to carry on a sustainable business, as non-operating revenues are irregular and unpredictable.
It might appear to some people that all types of revenue are the same as it brings in cash to your business. However, upon careful studies, it is found that there are significant differences between operating revenue and non-operating revenue.
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Operating revenue can be denoted by the money earned by a business through its primary operational activities. This is the major source of cash in the business and helps the organisation carry on with its business in a sustainable manner. For example, the operating revenue of a restaurant comes by selling food, whereas the operating revenue of an automobile company comes by manufacturing and selling cars, etc.
Non-operating revenue’s activities include revenue coming from investment in the financial market, selling an asset, etc. However, such type of activities is irregular and unpredictable. Hence, it is not considered the primary source of revenue in an organisation.
Operating income is the profit earned from the operational activities of a business after deducting the operational cost such as cost of goods sold, depreciation, wages, etc. Operating income portrays the actual profit earned by a company. Operating income is calculated on the money earned solely through operating activities, excluding the money earned from other resources. Operating income can be simply calculated by subtracting the production cost from the total revenue earned from operations.
By their names, the terms operating revenue and operating income might appear of the same meaning. However, there lies a fine line of difference between them both.
The revenue earned by a company solely through its primary business objective is known as operating revenue. The source of operating revenue differs from one company to another. It depends upon the industry where their business is set. Operating revenue is the primary source of money in a business that helps it to carry on with its operations.
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On the other hand, operating income is the net profit gained by a company by its main operating activities. Operating income can be obtained by subtracting the production cost and overhead from the total revenue earned from operations. Profit earned by other investing activities is not considered as operating income.
Let us assume that company A manufactures 100 televisions and earn total revenue of $100,000. The production cost (cost of raw materials, labour charge, salaries of employees, packaging, and logistics cost) is $35,000, and the overhead is $25,000. Therefore, the net profit is $40,000 after selling 100 televisions which are known as the operating income.