Operating revenue is the foundational revenue that a company generates from its core business activities.
For example, a retailer achieves its operating revenue through the sale of merchandise; a physician earns operating revenue by providing medical services. The specifics of what constitutes operating revenue can vary significantly based on the business or industry.
Key Takeaways
- Operating revenue is generated by a company’s primary business activities.
- Comparing operating revenue year-over-year helps to assess a company’s overall health and operational efficiency.
- It’s essential to separate operating revenue from non-operating revenue arising from infrequent, unusual, or one-time events.
Grasp the Fundamentals of Operating Revenue
Understanding the distinction between operating revenue and total revenue is crucial as it offers insights into a company’s productivity and profitability from its core operations.
Even though operating revenue is separately recorded on financial statements, some businesses may combine it with non-operating revenue to mask declines. Distinguishing and accurately identifying the sources of revenue is vital for evaluating a company’s health and efficiency.
Operating Revenue vs. Non-Operating Revenue
Non-operating revenue is generated from activities outside a company’s primary operations. Such revenue is typically infrequent and often unusual. Examples of non-operating income include interest income, gains from the sale of assets, lawsuit proceeds, and revenue from other unrelated sources.
For instance, a private university’s tuition fees are considered operating revenue, whereas donations from alumni are classified as non-operating revenue because they are neither expected nor part of the university’s ordinary operations.
On the university’s income statement, operating revenue and profit from operations are listed first. Non-operating revenue and profit follow, including revenue received from gifts and donations, informing stakeholders that such revenue is not a regular aspect of the institution’s business. The segregation is important since non-operating revenue may fluctuate significantly from year to year.
Special Considerations
Cash Flow
Non-operating revenue and income do not lead to consistent cash inflows year over year, illustrating why these are separately identified on the income statement. To sustainably fund its operations, a business must generate sufficient operating revenue. Companies that consistently generate operating revenue are less reliant on external financing and can operate with a smaller cash reserve.
For instance, if a company sells a fixed asset, such as a building, at a profit in a given year, that gain is recorded as non-operating revenue. Since this revenue is not part of the regular business scope, it should not be used to evaluate the success of a company’s core operations long-term.
Stock Prices
For successful companies, operating revenue and income are central factors in earnings per share (EPS), a critical metric for assessing a firm’s stock price.
EPS, calculated by dividing earnings available to common shareholders by outstanding common shares, reflects a company’s profitability. A well-managed company can increase its operating revenue and income by attracting more customers and entering new, profitable markets. As EPS increases, the stock’s perceived value improves, often driving up its market price.
Related Terms: Revenue, Non-Operating Revenue, Cash Flow, Income Statement, Earnings Per Share.
