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What is Operating Revenue?

Operating Revenue

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Operating Revenue

Operating revenue, also often referred to as sales revenue or just revenue, is the money a company earns from its primary business activities. This includes the sales of goods and services before any costs or expenses are subtracted.

For a manufacturing company, operating revenue is generated from the sale of the products it manufactures. For a service business, operating revenue comes from the services it provides. Retail businesses generate operating revenue from the merchandise they sell to customers.

The term “operating” is used to distinguish these revenues from “non-operating” revenues, which are earned from secondary, non-core business activities. Non-operating revenue might include things like interest income from investments, gains from the sale of assets, or one-time windfall payments.

Operating revenue is a crucial metric for businesses, as it shows the income generated from primary operations, reflecting the core business strength. Changes in operating revenue can indicate shifts in sales volume, pricing strategies, market demand, or competitive environment.

It’s important to note that operating revenue is always reported gross, meaning it’s the total revenue earned by the company before any deductions. Deductions such as returns and allowances, cost of goods sold (COGS), operating expenses, taxes, etc., are subtracted from operating revenue to calculate net income, the company’s final profit figure.

Example of Operating Revenue

Let’s take a hypothetical example of a company named “BikeMaster,” which manufactures and sells bicycles.

Here’s a simplified version of BikeMaster’s income statement for the fiscal year:

  • Sale of Bicycles: $2,000,000
  • Sale of Spare Parts (a secondary operation): $100,000
  • Interest Income (earned on the company’s investments): $50,000

The company’s primary business is manufacturing and selling bicycles. So, the revenue from that operation—$2,000,000—is considered its Operating Revenue.

The sales from spare parts, while related to the main business, are a secondary operation, so they may or may not be included in operating revenue depending on the company’s accounting policies and how significant this line of business is.

The interest income of $50,000 is a non-operating revenue because it does not stem from the company’s primary business operations—it comes from the company’s financial investments.

So, in this example, BikeMaster’s operating revenue from its core business operations would be $2,000,000 (only considering bicycle sales). If the company includes spare parts sales as part of its core business, the operating revenue would be $2,100,000.

Remember that this is a very simplified example, and real-world income statements can be much more complex, involving various sources of revenue and numerous types of expenses. Also, definitions can vary—for instance, whether or not to include certain items in operating revenue can depend on the company’s industry, size, and the relative importance of secondary operations to its business.

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