What is Operating Revenue?
Unfortunately, consistently making a profit is a challenge for many small business owners. Indeed, 29 percent of small businesses fail in the first five years because they run out of cash. To avoid this common pitfall, it’s important to track a few key financial metrics.
One key metric is operating revenue, which allows you to gauge the health of your company and its operations year over year. To help you better understand its importance, we’ll provide a detailed explanation of what operating revenue is, how it’s measured, how it affects your business, and how you can manage it to maximize your profitability.
Everything You Need to Know About Operating Revenue:
Operating revenue is revenue created from a company’s primary business activities. Since every business is unique, what constitutes operating revenue varies by industry and business model.
For example, if you’re a retailer, operating revenue is generated by selling your merchandise. If you own a car repair shop, operating revenue is based on the number of customers (and cars) you serve over a given period.
Why Operating Revenue is Important:
Operating revenue is the driving force of any business. Without consistent operating revenues, a business cannot fund its day-to-day operations.
In most cases, operating revenue is a more valuable measure than total revenue as it provides important information about the productivity and profitability of a company’s primary operations. Companies with strong operating revenues – in other words, steady customers and predictable sales – typically have more stable cash flows than companies with high amounts of non operating revenue.
Since a large percentage of businesses fail due to lack of cash, it’s easy to see why healthy businesses must maintain consistent operating revenues.
Operating Revenue vs. Non Operating Revenue:
A company earns operating revenue by selling its core products or services. Conversely, nonoperating revenue is earned from other non-routine sources, such as the one-time sale of a fixed asset like a building or equipment.
Nonoperating revenue may also include interest earned on investments, late fees charged to customers, proceeds from lawsuits, or revenue from licensing and royalties. Although these earnings are included in a company’s total revenue, they don’t come from its day-to-day operations. Therefore, it can’t be relied upon to assess the general health of the business.
The ratio of operating revenue to non operating revenue can reveal important information about your business’s strength and stability. Too much nonoperating revenue may indicate current or future cash flow problems.
How to Manage Operating Revenue:
If your current levels of operating revenue aren’t where they need to be, there are ways you can adjust your approach to increase them. Businesses that can generate operating revenue are better able to fund their operations without seeking outside financing. This is important, since borrowing money can be expensive and adds risk to your balance sheet.
In general, there are four primary ways to increase operating revenue:
1. Increase number of customers:
Without customers, you don’t have a business. One of the most effective ways to increase operating revenue is to get more customers, who will in turn give you more sales.
To attract more people to your business, you can initiate a social media campaign, build an email list, or post an advertisement in your local newspaper, among other strategies.
2. Increase average transaction size:
If you already have a consistent customer base, you can try upselling each time you make a sale to increase operating revenues. If you’re a retailer, consider offering promotions such as buy-one-get-one-half-off. Or, if you’re a service-based business, you can bundle certain services to make the total price more attractive to the customer.
3. Increase frequency of transactions per customer:
One of the most effective ways to ensure repeat business is to offer your customers a loyalty program. In fact, more than two-thirds of consumers say their choice of retailer is influenced by where they can earn loyalty points.
4. Raise your prices:
Sometimes the best approach is simply to raise your prices. If you provide a superior product or service, don’t hesitate to raise your prices to match the value you offer your customers.
Bottom Line: Don’t Discount Operating Revenue
As a business owner, managing your company’s finances may seem like one of the least exciting responsibilities you can take on. Still, doing so is a necessary evil if you want your business to be sustainable over the long run. If you don’t already track important financial metrics like operating revenue, be sure to start now. It’s better to find inefficiencies in your business model and operations early so you have time to remedy them.
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