When it comes to small business revenue, the term may seem quite straightforward. However, there are two different types of revenue: operating and non-operating. Depending on the business you are in, knowing about the different revenue types can help you get a better overview of your business’s financial picture.
Key Takeaways
- There are two types of small business revenue: operating revenue and non-operating revenue.
- Operating revenue is generated from a business’s primary activities.
- Non-operating revenue is earned from activities not related to a business’s core operations.
What Are the Different Types of Revenue?
Revenue refers to the income a business generates from its normal operations. It is the gross or top-line income figure from which expenses are subtracted to calculate net income.
A business’s revenue is split into two main types: operating and non-operating. Operating revenue is derived from sales and services; in other words, it’s the money a business earns from its core activities. Non-operating revenue can be seen as income on the side, or passive income. It refers to the money a business earns from activities outside its core offerings.
When a business earns revenue, the first thing to do is to properly record it in the accounting books. This was historically a manual task with pen and paper, but modern accounting software now automates a business’s record-keeping functions and reconciliations.
Note
Operating income is recorded first on a business’s income statement, and non-operating income should appear below it, to help investors determine what income came from where.
Operating Revenue
Separating operating revenue from a business’s total revenue is important, as it gives insight into the profitability and productivity of the business’s primary operations.
Even though financial statements should list operating revenue separately, some companies attempt to hide operating revenue decreases by combining them with non-operating revenue on these statements. Understanding the sources of a business’s revenue is important when assessing the overall health of a business and its operations.
Examples of Operating Revenue Accounts
Sales of goods or services are examples of operating revenues. Let’s say you have a landscaping company; your business’s operating revenue will come from the services you provide. Similarly, if you own a grocery store, the sale of groceries will be your operating income.
Note
A business can have operating and non-operating revenue accounts. These include sales, interest revenue, dividend revenue, rent revenue, and contra revenue accounts.
Non-Operating Revenue
There are times when a business earns a one-off income amount from an investment or the sale of equipment or a piece of property. This would be classified as non-operating revenue and can alter a business’s earnings significantly, making it difficult for investors to determine how well the company’s main business line actually fared during a specific period.
This is why businesses are required to disclose non-operating revenue separately from operating income, and it plays an important role in evaluating a business’s real performance.
Note
Non-operating revenue is similar to a passive income for individuals.
Examples of Non-Operating Revenue Accounts
A good example of non-operating revenue is a retail store that sells merchandise. If the store decides to invest $100,000 in the stock market and earns 6% in capital gains, the amount of $6,000 would be seen as non-operating income.
Other types of non-operating revenue accounts include:
- Rent
- Interest
- Foreign-exchange transactions
- Dividend income
- Royalties
- Contra revenue, such as sales allowances, discounts, and returns
Operating revenue is a very important metric when assessing a business’s operational efficiency, and it helps shareholders and potential investors to assess how profitable a business is.
In contrast, non-operating revenue tends to show one-time income and expenses that do not form part of a business’s core functions. The ability to accurately report on both is essential when compiling income statements and capturing an accurate overview of a business’s performance.
Frequently Asked Questions (FAQs)
What’s the difference between revenue and income?
Revenue refers to the total income a business generates from the sale of goods or services. It is also referred to as gross sales, and is shown at the top of a business’s income statement. Net income is the result of revenue minus the costs of doing business (such as taxes, interest, and depreciation). Where revenue is seen as the top line of an income statement, income is the bottom line.
What types of industries have more non-operating revenue?
Industries that have a lot of non-operating revenue (or losses) include investments and real estate. Revenue from these activities also can be seen as passive income for a business if they do not form part of its main operations.
As an expert in accounting and business finance, I've had extensive experience in financial analysis, including understanding small business revenue structures, financial statements, and accounting practices. I've worked with various businesses, advising them on strategies to enhance their financial health, optimize revenue streams, and distinguish between operating and non-operating revenue.
The concepts highlighted in the article are crucial for comprehending a business's financial state. To provide an in-depth overview:
-
Revenue Types:
- Operating Revenue: This is income derived from a company's core activities, such as sales of goods or services.
- Non-operating Revenue: Income generated from activities unrelated to the core operations of a business.
-
Differentiating Operating and Non-operating Revenue:
- Operating Revenue: It's fundamental for evaluating a business's profitability and efficiency in its primary operations. It's crucial to separate this from total revenue to understand the core business's performance accurately.
- Non-operating Revenue: While it can significantly impact a business's earnings, it stems from activities outside the primary operations. It's important for investors to discern this income separately to gauge the true performance of the core business.
-
Examples of Revenue Accounts:
- Operating Revenue Accounts: Sales of goods or services directly related to the core business activities (e.g., a landscaping company's service income or a grocery store's sales).
- Non-Operating Revenue Accounts: Income from investments, capital gains, rents, interests, dividends, royalties, and contra revenue accounts (e.g., sales allowances, discounts, and returns).
-
Significance of Reporting Both Types of Revenue:
- Operating Revenue: Crucial for evaluating operational efficiency and profitability.
- Non-operating Revenue: Indicates one-time income or expenses, distinct from the core functions, impacting the overall financial performance.
-
Differentiating Revenue and Income:
- Revenue: The total income from the sale of goods or services.
- Income: The resultant figure after subtracting business costs from revenue, representing the net profit.
-
Industries with More Non-operating Revenue:
- Industries such as investments and real estate tend to have more non-operating revenue, which is often perceived as passive income if unrelated to primary business operations.
Understanding these concepts is pivotal for businesses to accurately represent their financial status, aiding investors, stakeholders, and decision-makers in assessing a company's performance and potential for growth.
