What it means
Total revenue reported at the top of an income statement can include several different kinds of income. Operating revenue is the portion that comes from what the business actually does for a living: the sandwiches sold, the subscriptions billed, the hours invoiced.
Everything else is classed as non-operating or other income. The separation matters because non-operating income is usually unreliable and non-repeatable.
A one-off gain from selling a piece of land can make a weak year look strong, and anyone building a forecast off that number will overestimate the following year badly. Investors and lenders therefore focus almost entirely on operating revenue when judging growth.
Deciding what counts as operating revenue depends on the business. Interest income is non-operating for a bakery but is the main operating revenue of a bank, and rent received is non-operating for a manufacturer but core for a property company.
The test is whether the income arises from the activity the business exists to carry out. Operating revenue is also the denominator in most of the ratios managers rely on.
Gross margin, operating margin and cost ratios all divide something by revenue, so including a one-off gain in the denominator quietly distorts every one of them. Analysts routinely strip such items out before calculating anything.
A related nuance is the difference between gross and net operating revenue. Gross figures are before discounts, returns and allowances, while net operating revenue removes them, and the gap can be significant in retail and subscription businesses.
Reports should state which basis is used, and comparisons should always use the same one.
In practice
Real-world examples.
Example
A private school reports total income of $12,000,000, of which $11,300,000 is tuition and $700,000 is investment income from its endowment. The board tracks tuition separately because only that figure reflects enrolment trends.
Example
A car dealership sells a surplus site and books a $1,900,000 gain. The finance team keeps it out of operating revenue so that the sales team's performance against target is measured only on vehicles and servicing.
Example
A charity distinguishes between operating revenue from its trading arm and donation income received as grants. Funders want to see the trading arm growing on its own, rather than being propped up by one-off grants.
Formula
Calculation
Operating Revenue = Total Revenue - Non-Operating Income
Net Operating Revenue = Gross Operating Revenue - Discounts, Returns and Allowances
A workflow software company reports total revenue of $4,300,000 for the year. Its income breaks down into subscription fees of $3,200,000 and implementation services of $800,000, plus interest earned on cash reserves of $180,000 and a gain of $120,000 on selling an unused office fit-out.
Operating revenue = $3,200,000 + $800,000 = $4,000,000.
Non-operating income = $180,000 + $120,000 = $300,000.
Check: $4,000,000 + $300,000 = $4,300,000, matching total revenue.
Operating revenue as a share of total revenue = $4,000,000 / $4,300,000 = 0.930, or 93%.
If the company reported an operating margin using the full $4,300,000, it would overstate the strength of its trading performance by folding in $300,000 that has nothing to do with selling software, $120,000 of which will not repeat next year at all.Case study
Seen in the real world.
Kestrel Marine Supplies is a fictional chandlery business created here as an illustrative example. In one financial year it reported total revenue of $6,500,000, up from $5,400,000, and the owners prepared to open a second branch on the strength of that growth.
A closer reading showed that $800,000 of the $1,100,000 increase came from a legal settlement and a foreign exchange gain, neither of which had anything to do with selling marine equipment. Operating revenue had actually risen only modestly, from $5,300,000 to $5,600,000, a growth rate of about 5.7%.
Kestrel delayed the second branch by a year and used the settlement cash to clear supplier debt instead. When operating revenue growth reached double digits two years later, the branch opened on a much firmer base.
Watch out
Common mistakes.
- Using total revenue when a ratio calls for operating revenue. One-off gains inflate the denominator and quietly flatter every margin and cost ratio in the pack.
- Assuming operating revenue means cash received. Revenue is recognised when it is earned, so a large invoice can be operating revenue months before the customer pays.
- Applying one company's definition to another. Interest income is non-operating for a retailer but is core operating revenue for a bank or leasing company.
Questions
People also ask.
Is operating revenue the same as turnover?
In most everyday use yes, because turnover normally refers to sales from ordinary activities, but check whether a reported turnover figure includes other income.
Should discounts be deducted from operating revenue?
Yes, net operating revenue is stated after discounts, returns and allowances, and this is the basis most reporting standards expect.
Why do lenders focus on operating revenue?
Because it is the recurring income that will still be there next year, which is what determines the ability to service a loan.
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