Operating revenue is the income a business earns from its main operations. It is the amount of money received from sales of goods or services, fees and other transactions related to the company’s main activities. Operating revenue is an important indicator of a business's financial performance. It is used to calculate the operating profit, which is the amount of money left over after deducting all operating costs. By comparing operating revenue and operating costs, management can assess the efficiency and success of their operations.
Example of operating revenue
- Sales of Goods: A retail business selling clothing generates revenue through the sale of its products. This revenue is recorded as operating revenue.
- Services: A consulting firm providing advice to clients will record the fees it charges for these services as operating revenue.
- Interest: A bank will record the interest it earns from its lending activities as operating revenue.
- Rent: A landlord will record the rent it earns from its tenants as operating revenue.
- Royalty Fees: A business that licenses its intellectual property to others will record any royalty fees it receives as operating revenue.
- Sales of Assets: A business may sell assets such as land, buildings, or equipment that are no longer needed in its operations. The money received from these sales is recorded as operating revenue.
When to use operating revenue
Operating revenue is an important financial metric used to measure a business's performance. It is used to assess the efficiency and success of operations, and can help in the following ways:
- To calculate the operating profit, which is the amount of money left over after deducting all operating costs.
- To assess the profitability of the company’s operations.
- To analyze the effectiveness of different departments and activities within the business.
- To compare the performance of different divisions or businesses within the company.
- To identify cost savings or areas of inefficiency.
- To analyze the impact of changes in pricing or product mix on the business.
- To evaluate pricing strategies.
- To track key performance indicators, such as return on investment (ROI) and customer lifetime value (CLV).
Types of operating revenue
Operating revenue includes the income a business generates from its main operations. This can include sales of goods or services, fees, and other transactions. Some of the types of operating revenue are:
- Sales of Goods and Services - This includes money received from the sale of products and services that are part of the business’s main operations.
- Fees - This includes fees for services rendered or for using a product or facility.
- Investment Income - This includes money earned from investments such as stocks, bonds, and other financial instruments.
- Other Revenue - This includes money earned from non-operational activities such as licensing fees, royalties, and other miscellaneous income.
Overall, operating revenue is an important indicator of a business’s financial performance and is used to calculate the operating profit. By comparing operating revenue and operating costs, management can assess the efficiency and success of their operations.
Advantages of operating revenue
Operating revenue is an important indicator of a business's financial performance and provides several advantages. These include:
- Increased cash flow: Operating revenue provides a steady stream of cash that can be used to fund operations and pay for investments, such as new equipment and marketing campaigns.
- Improved financial statements: Operating revenue improves the financial statements of a business, making it easier for investors to evaluate the performance of the business.
- Increased profits: Operating revenue increases the amount of money left over after deducting the operating costs, resulting in improved profits.
- Improved efficiency: By tracking operating revenue and costs, management can identify areas of inefficiency and make improvements to increase profitability.
- Enhanced competitiveness: Operating revenue allows a business to compete more effectively in their industry by providing the funds necessary to develop new products and services.
Limitations of operating revenue
Operating revenue is an important metric for evaluating a company’s financial performance, but it has some limitations. These include:
- Non-recurring items: Operating revenue does not include non-recurring items like one-time sales, which can distort the overall picture of the company’s performance.
- Timing differences: Operating revenue is reported at the time of sale but costs may be incurred at different times, which can lead to mismatches between income and expenses.
- Seasonal fluctuations: Operating revenue can be affected by seasonal fluctuations, which can make it difficult to compare financial performance over different periods of time.
- External factors: Operating revenue can be affected by external factors such as economic conditions, which can make it difficult to accurately measure performance.
- Intangible assets: Operating revenue does not include the value of intangible assets, such as intellectual property, which can have a significant impact on a company’s performance.
- Burkart, R. M., & Kolar, J. W. (2013, June). Comparative evaluation of SiC and Si Pv inverter systems based on power density and efficiency as indicators of initial cost and operating revenue. In 2013 IEEE 14th Workshop on Control and Modeling for Power Electronics (COMPEL) (pp. 1-6). IEEE.
- Abdel-Hafez, M. H. (2015). Operating revenue changes in a demutualized stock exchange. International Journal of Business and Economic Development (IJBED), 3(1).
- Van Dender, K. (2007). Determinants of fares and operating revenues at Us airports. Journal of Urban Economics, 62(2), 317-336.