Operating revenue is the sales associated with the normal daily operations of a business. For example, the meals sold by a restaurant would generate operating revenue, while the sale of its delivery van would instead generate a gain or loss. The concept of operating revenue is important, because it reveals the core sales productivity of a business. Operating revenue information is especially valuable when tracked on a trend line, since it can reveal spikes or declines in sales activity that could indicate a long-term trend.
Some organizations try to mask declines in their operating revenue by consolidating this amount with revenues generated by non-operational aspects of their business. If the proportion of these non-operating revenues gradually increases over time, it is a possible indicator that a business is scrambling to hide a decline in the revenue generated by its core activities.
The concept can be further refined for situations in which the sales of a business are largely comprised of sales related to a single contract or customer. If this information can be broken down to separate the single-source revenue and all other revenue, it can indicate whether the source upon which the company is dependent is generating a declining trend of revenues, which can indicate a major problem for the continued existence of the business.
Example:
Let’s assume that Company XYZ sells $1,000,000 of widgets — its main business — this year. It also sold $40,000 of very old, outdated inventory that was stashed under a desk for six years, and it performed a one-time service for some clients that brought in $500,000.
In this example, Company XYZ’s operating revenue is simply the $1,000,000. The other $540,000 of revenue is not related to the company’s day-to-day operations — it is not associated with the company’s core operations, nor is it expected to be anything more than a one-time event.
Why it Matters:
Operating revenue is the lifeblood of any company. Companies whose revenues include high amounts of nonoperating revenue are often less stable because they are dependent on “Hail Mary passes” rather than steady, recurring customers. In turn, high amounts of operating revenue usually translate to more stable cash positions.
Note, however, that determining what exactly counts as operating revenue can be as much an art as science. Analysts must be careful to scrutinize rental and leasing activity, discounts, and sources of expenses when making this determination. After making the appropriate adjustments, the analyst can then calculate a more accurate operating profit.
What constitutes operating revenue can be difficult to resolve, especially when a business is transitioning out of one product line or industry and into another. In this situation, it is possible that the revenues associated with both areas are operating revenue, but that the one related to the new area is more important, since this is the direction in which the company is headed.
