What is Operating Revenue And How Does It Work?
Unfortunately, making a consistent profit is challenging 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 your company’s financial health operations year over year. To help you better understand its importance, we’ll provide a detailed explanation of what operating revenue is. We’ll also explain how it’s measured 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 it 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, it’s based on the number of cars you service over a given period.
Why Operating Revenue is Important:
Operating revenue is the driving force of any business. Without this consistent revenue, a business cannot fund its day-to-day operations.
In most cases, operating revenue is a more valuable measure than total revenue. This is because iit provides important information about the productivity and profitability of a company’s primary operations. Companies with steady customers and predictable sales typically have better 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 crucial that businesses maintain consistent operating revenues.
Operating Revenue vs. Non Operating Revenue:
A company earns operating revenue by selling its core products or services. Conversely, non operating revenue is earned from other non-routine sources. For example, as the one-time sale of a fixed asset like a building or equipment.
Non operating revenue may also include interest earned on the following transactions:
- Late fees charged to customers
- Proceeds from lawsuits
- Revenue from licensing and royalties.
Although these earnings are included in a company’s total amount of revenue, they don’t come from its daily 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 stability. Too much non operating revenue may indicate current or future cash flow problems.
How to Manage Operating Revenue:
If your current levels of operating income aren’t where they need to be, adjust your approach to increase them. Businesses that can generate this type of revenue are more likely 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, which will increase sales revenue.
To attract more people to your business, you can try the following strategies:
- Start social media campaigns
- Build an email list
- Post an advertisement in your local newspaper
2. Increase average transaction size:
If you already have a consistent customer base, you can try upselling to increase these revenues. If you’re a retailer, consider offering promotions such as buy-one-get-one-half-off. Or, if you own a service business, you can bundle 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 are more likely to select a retailer if they offer a loyalty program.
4. Raise your prices:
Sometimes the best approach is simply to raise your prices. If you provide a superior goods or services, don’t hesitate to raise your prices to match the value.
Bottom Line: Don’t Discount Operating Revenue
As a business owner, managing your company’s finances may seem daunting. 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 faults in your business model and operations early so you have time to remedy them.
Editor’s Note: This post was updated for accuracy and comprehensiveness in October 2020.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.