Operating Revenue

Operating Revenue means revenue earned by an individual, firm, company, organization from the core activities which they undertake regularly. There are many ways to earn revenue, but the operating revenue is earned from the core business activities the organization undertakes in their main work.

Thus, it is the total amount generated from the primary activity, which represents the main income source of the business. It excludes non-operating items like dividend, interest, asset sale, taxes and other non-operating costs. It is an important financial metric used to evaluate the financial health and earning capacity from main business operations.

There is no hard and fast rule or set procedure to earn it. The regular activities you do in the business become regular and operating activities. These regular activities are also known as Operating Activities. The companies spent on these core activities to earn revenue.

These operating activities, as well as net operating revenue, both run hand in hand, i.e., from one hand, the money goes out for the operating activities. On the other hand, money comes in from the revenue earned from these core activities. To earn revenue, one must have a clear understanding of the activities needed to perform to justify the revenue.

 desired to earn.

It reflects the working of the business, i.e., if a business is being run properly with adequate guidance and understanding of the business or whether the business needs a proper understanding.

Net operating revenue directly relates to the core operation of the enterprise. It represents the main source of income of the company.

Let us look at the method of operating revenue calculation in the following details. We add up all the different sources of direct revenue generated from the business. They include the following.

• Goods sold – This includes the money earned from sale of goods and services that the company produces or buys for the purpose of resale. It is the main source of income for it.
• Services given – This refers to that part of revenue which the company earns from the sale or resale of services, in case its main business is service related. Services may include any consulting related work, any monthly or yearly subscriptions or some maintenance jobs done for the clients.
• Licensing – Revenue earned from such sources where the company may permit some other business to use its royalty or license or trademark or any other kind of intellectual property and take fees in return.
• Membership -This includes any type of membership or some form of subscription that the business gives to its clients on a periodic basis.

The business needs to add up all the above types of income in operating revenue calculation to get actual amount of revenue related to the core operation.

Let us try to understand the concept of operating revenue estimate with the help of some suitable examples.

Example #1

Let us take an example of a business providing properties on hire and sale. What will be the significant Operating activities from the point of view of the above business?

Solution 

The significant operating revenue for the business as mentioned above of hire and sale of properties would be:-

1. Revenue from Renting of properties.
2. Revenue of Commission from Sale and purchase of Properties;
3. Revenue from Sale of properties.

In the case of properties business, those mentioned above would be considered as operating revenue accounts because the businesses would be regularly working on sale/purchase of properties and providing them on rent.

Example #2

Let us suppose a business of trading in groceries of Mr. Mohit. Determine his Operating Revenues.

Solution 

The Operating Revenues for Mr. Mohit's trading business would be as follows:

1. Revenue from trading of groceries;
2. Revenue from a commission on the sale of groceries

Example #3

What will the Operating Revenue in case of a business of Services of Electronics?

Solution 

The Operating income in case of a business of Servicing of Electronics would be as follows:

1. Revenue from Service Charges
2. Revenue from Sale of parts of the Electronic items used in Service

Thus, the above examples give us a clear idea about the types of operating revenue and how to identify them under different circumstances and different kind of sectors or industries.

It is necessary to understand the importance of any financial concept in order to use it is a proper and useful manner during the fundamental analysis of a business. The importance of the concept are given below:

• The operating revenue estimate is one of the most critical revenue for any business as the company earns its main profit from these core activities. A business’s significant portion of assets is invested to earn from the core activities. The businesses register themselves with the registrar with their main operating activities, which they undertake. They need to be intimate with the registrar in case there is any change in the primary operations of the business.
• Since the business’s significant assets are invested in the operating activities, it is highly important to earn a high Operating Income as considerable business expenses have to be incurred from those revenues earned by the businesses. To earn it, there is a number of operating non-operating expenses incurred by the businesses. To recover those expenses to run the businesses in profit with better returns to the owners, the businesses need to earn higher operating revenue.
• They are of high importance to the stakeholders of the business, as they take crucial decisions for future growth. Their decision will be based on whether the business is capable of earning revenue or if it is good to move out of the business if there is not much growth.
• The business growth is also measured based on the increase or decrease of the Operating Income as higher operating revenue would indicate that the business is doing good in its core activities. In contrast, a fall in revenue would create concerns among the stakeholder and business owners. E.g., whether to continue with the business or to invest in some other opportunities.

Both the above types of revenue earned in the business are equally important to assess the profitability and financial health of the company. However, there are some differences between them, as follows:

1. Operating Revenues are the regular income for any business, whereas Non-Operating Revenue is not a regular income.
2. It is earned from the Core Activities of the business. In contrast, the Non-Operating Revenue is earned from the Non-Operating activities of the business.
3. It helps in forming important business decisions, while Non-operating revenue helps in investing decisions.
4. It helps the stakeholders to make decisions on the continuity of business, whereas Non-Operating Revenues are additional incomes that do not affect such decisions.
5. Operating revenue accounts is the regular income of the business, but Non-Operating Revenue is additional revenue that is not earned from the operating activities of the business.
6. Examples of Operating Income are Revenue from the Sale of Goods, Revenue from Professional Services, Revenue from Service Charges, Revenue from Rental Income from letting out properties, Revenue from Commission earned from the sale of properties, etc.

Examples of Non-Operating Revenues are Interest Income from Fixed Deposit, Dividend on Investments, Profit from sale of Investments, profit on the sale of old furniture, profit from the sale of machinery, Interest on Income tax refunds, etc.

This article has been a guide to Operating Revenue and its definition. Here we discuss how operating revenue works along with examples, importance, and its differences from non-operating revenue. You may learn more about financing from the following articles –

• Calculate Operating Profit
• What is Non Operating Income?
• Operating Expense Formula
• Operating Ratio