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.
- 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?
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.
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.
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.
A business can have operating and non-operating revenue accounts. These include sales, interest revenue, dividend revenue, rent revenue, and contra revenue accounts.
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.
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:
- Foreign-exchange transactions
- Dividend income
- 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.