Revenue from Operations can be considered as the heartbeat of any business, as it reflects the company’s true financial health and efficiency. Unlike other income sources, it focuses solely on earnings from the business’s primary activities, making it a vital metric for investors and decision-makers. Let’s explore its meaning, importance, types, and examples to understand its significance better.
What is Revenue from Operations and Its Definition?
In simple terms, the money generated by a business from selling its primary products or services is called Revenue from Operations. Additionally, Revenue from Operations is also known as ‘Operating Revenue’. As the name suggests, it focuses solely on the money generated from the business’s core operations and excludes other sources of income, such as investments, asset sales, or one-time gains. Hence, This metric is useful for analysts and investors, as it highlights how the business is performing in its main area of operations.
Revenue from Operations shows the amount remaining after subtracting the cost of goods sold, discounts, allowances, and returns from the revenue generated through core operations. Notably, it differs from Gross Profit because you calculate Gross Profit by subtracting the Cost of Goods Sold (COGS) from Total Revenue. This distinction provides a clearer understanding of a company’s operational efficiency and profitability.
Key-Takeaways
- Revenue from Operations is the income that is generated by the company’s core business activities.
- Revenue from Operations is also known as Operating Revenue.
- Revenue from Operations = Selling Price * Total Units (number of products) sold – COGS – Allowance – Discount – Returns.
Operating Revenue (Revenue from Operations) Vs Non-Operating Revenue:
Businesses do not depend on one source of income but they are likely to have more sources to generate income, While some income is related to their business operations, Some are non-related to Operations. The money that is generated from core business activities is called ‘Operating Revenue’ and the money that is made from non-core business activities are called ‘Non-Operating Revenue’. So in this article, Let’s focus on Operating Revenue and understand the ‘Revenue from Operations’ further.
Importance of Revenue from Operations?
Before diving into the importance, Do you know? Every quarter and once in a year, companies disclose their financial results. In which the Revenue from Operations in shown at the top of the profit and loss statement.
So, why is this important? Here are some key reasons:
- Primary Business Indicator:
It provides insights into the company’s ability to generate income from its core business activities, excluding non-operating items like investments or one-time gains. By focusing on it, businesses can better understand their strengths and weaknesses, identify areas for improvement, and make informed decisions about resource allocation and strategic investments.
- Profitability Insight :
This component in the Profit and Loss statement is a key indicator of a company’s profitability and cash flow. By analyzing this metric, businesses can determine their ability to cover operating expenses, invest in growth initiatives, and return value to shareholders.
- Help Investors :
For investors, analysts, and other stakeholders, It is an important metric for evaluating a company’s financial health. By providing a clear and accurate picture of a company’s core earnings, it enables investors to make more informed, data-driven decisions about their investments
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Types of the Revenue from Operations with examples:
There are various types of companies operating in different sectors, each with unique methods of generating revenue from core activities. Let’s explore the main types of revenue from operations.
Revenue from product sales:
Companies most commonly generate revenue through core business operations by selling physical goods or products. This revenue primarily comes from industries like manufacturing, retail, and e-commerce, where selling tangible items forms the foundation of their income streams.
- Example: Tata Motors is a manufacturer of passenger vehicles and commercial vehicles such as cars and trucks. For instance, the sales of cars and trucks made by Tata Motors constitute the Revenue from Product Sales for the company.
Revenue from Services:
Unlike selling products physically, in this type, The companies generate revenue by providing intangible services to their customers and charging some amount for the services. The companies that work in the finance, and health sectors are examples of businesses that earn revenue from services.
- Example: HDFC Bank earns revenue from their customers by charging interest on the loans and credit card services they provide.
Subscription Based Revenue:
This type of revenue is generated when businesses provide services or products to customers for a specific period, usually in exchange for a recurring fee. The subscription model allows customers to access the service or product for as long as they pay the subscription fee.
- Example: To watch shows/movies on Netflix, users must pay for one of the subscription plans, which typically renews monthly. This way, Netflix earns revenue from its operations through subscription-based sales.
Commission Based Revenue:
Another way to generate revenue is by charging clients fees for services provided. Businesses earn commission-based revenue by assisting clients in buying or selling tangible or intangible assets. This approach is common in industries like brokering services, where brokers earn commissions on trades they execute for their clients.
- Example: A broker like Zerodha or Angel One, takes some amount from their clients for each transaction made by them.
Revenue from Operations Formula:
This term can be calculated after subtracting the cost of goods sold along with the discounts, allowances, and returns from the total revenue generated by core business activities. Below is the formula that will help to calculate it easily.
Revenue from Operations = Net Sales – Cost of Goods Sold (COGS)
Where,
Cost of Goods Sold (COGS) = The direct costs incurred in producing the goods or services that were sold. This is subtracted from Revenue from Operations to calculate Gross Profit.
Net Sales = Gross Sales – Discounts – Allowances – Returns
Here’s what each term means:
Gross Sales = The amount before any deduction is known as Gross Sales, It is calculated by Total Units Sold * Unit Price.
Discount = It is described as the reduction in price of a product or a service offered by the company to their Customers.
Allowance = Allowances refer to the reduction in selling price due to defect, or damage.
Return = A product that is returned by a customer due to dissatisfaction, defect, or incorrect order.
Now that we’ve covered the calculation, Let’s take a look at the FAQs
FAQs:
Q.1 Are the Revenue and Revenue from Operations are the same?
No, Revenue represents the amount companies generate by selling their core products before any deductions. On the other hand, companies calculate Revenue from Operations by subtracting the direct costs incurred during production from the revenue generated.
Q2. Operating Revenue vs Net Revenue.
The revenue earned by a company from its primary business activities after subtracting operating expenses is Operating Revenue. Meanwhile, Net Revenue refers to the amount calculated by subtracting Discounts, Allowances, and Returns from Gross Sales.
Q3. Where can I find a company’s Revenue from Operations?
You can find it in the ‘Investor Relations’ section of the company’s website, typically at the top of the Profit and Loss statement. Alternatively, you can also check the website of the relevant stock exchange.
Here we finish our article & we hope that we made it easy for you to understand this term. If you have any queries or feedback, please let us know in the comments below.
