Revenue is the primary focus of many business owners and with good reason. Getting money flowing into your business is the first step toward success and profitability. In fact, without revenue, you don’t have a business.
Since revenue is so important, it must be easy to understand, right? Isn’t any money coming into the business revenue?
Actually, not all money coming into your business is considered revenue. And the inflow that is revenue takes several different forms. It’s important to understand how each type of revenue impacts your business accounting and financial statements.
When you think about your business’s revenue, you are probably thinking about a very specific type of revenue: operating revenue. Both operating revenue and non-operating revenue have a positive impact on your business’s finances, but they are not created equal—nor are they reported in the same way on your financial statements.
So, what is operating revenue, and how does it differ from non-operating revenue? How can you tell the two types of revenue apart, and why is it important to do so? Let’s start with a brief operating revenue definition and several examples.
Operating revenue definition
Operating revenue comes from your business’s primary income-generating activity or activities. You might already be familiar with operating revenue, but just know it by a simpler name: sales.
When you first start your business, you will probably only have one or two income-generating activities. These activities are usually directly related to the sale of your product or the delivery of your service. As your business grows, though, you will likely develop other income-generating activities in your business. Not all of these income-generating activities produce operating revenue, though.
Let’s clarify what operating revenue is—and what it is not—with a series of examples.
Operating revenue examples
Let’s say a business produces income in three different ways:
Sales of merchandise
Contributions from donors
Providing services to customers
Which of these three income-generating activities represent operating revenue?
It depends on the business. Here are three examples of how these three types of income-generating activities impact three different types of businesses.
A retail business typically will produce operating revenue from the sale of merchandise. However, that same business might occasionally bring in an outside expert to provide a workshop (service) for customers; this is common in craft and home improvement stores. Additionally, whenever the business is considering launching a new product, they might do some crowdfunding (where they solicit contributions from donors).
This retail business has three types of income, but only one—the sale of merchandise—is operating revenue.
A nonprofit organization, on the other hand, often produces its operating revenue through contributions from donors. But they might also sell merchandise (like T-shirts, window decals, and tote bags) to raise awareness for the organization. Sometimes, a nonprofit will even provide a service—like a community fair—at a reduced cost.
Like the retail business, the nonprofit organization has three types of income, but only the contributions from donors are considered operating revenue.
A service-based business—like a preschool—sells services to their customers, and the customers pay for those services through tuition. Like the nonprofit organization, the preschool might also sell merchandise, either to raise awareness or promote community spirit. Once a year, the preschool might do a fundraising campaign to encourage past customers and other members of the community to contribute to the preschool’s capital fund.
In this example, the preschool—like the retail business and the nonprofit organization—has three types of income. But only the tuition from the service provided to their customers is considered operating revenue.
As you can see from these three examples, what is operating revenue for one business might be non-operating revenue for another. To further complicate things, different businesses within the same business type might have different primary income-generating activities. In the example of the retail business, workshops and classes could be offered on a regular basis, and so they would be considered operating revenue.
If you aren’t sure how to classify your various income-generating activities to properly identify your operating revenue, your business accountant or bookkeeper can help.
Operating income vs. revenue
So far, we’ve been very careful to use the word “revenue” when referring to the cash inflow from your primary income-generating activity. The words “income” and “revenue” are often used interchangeably, though. There aren’t any problems with this, as long as you are certain you understand the meaning of the words as they pertain to your financial statements. Let’s take a closer look at operating income vs. revenue.
Typically, “revenue” means operating revenue, or “top-line” revenue (“top line” because it is the first number on your income statement). In other words, revenue is the total amount of money coming into your business from your primary business activity, less any refunds or returns. The financial statements produced by many modern accounting software packages refer to revenue as “total income.”
On the other hand, operating income is your income after subtracting the operating expenses in your business from your gross profit. Your cost of sales—or cost of goods sold (COGS)—is deducted from your revenue (total income) to calculate your gross profit. Operating expenses are the expenses that go into running your business: rent, administrative costs, supplies, etc.
Operating income is like net income—or your bottom line—except operating income doesn’t include interest, taxes, or non-operating income.
The important thing to keep in mind here is that operating income is not the same as operating revenue/top-line income/total income. Operating revenue or total income is the total cash inflow from your primary income-generating activity. Operating income is the income you have after subtracting the costs of doing business. When you are discussing your financial statements with your accountant or bookkeeper, make sure you are clear about the terms he or she is using.
Operating revenue in your financial statements
Operating revenue appears on your income—or profit and loss (P&L)—statement. As mentioned above, it is the top line—or total income—on the income statement. If you issued refunds in your business, they are subtracted from the total sales to arrive at operating revenue (sometimes also called “net sales”).
Why operating revenue is important
Understanding your operating revenue—what it includes and what it doesn’t—allows you to make year-over-year comparisons of your income statement. At a glance, you can assess the health of your business using the metric of revenue.
If operating revenue and non-operating revenue were combined on your profit and loss statement, unusual activity—like the sale of a piece of equipment—could lead you to make an incorrect assessment of your business’s revenue trend. This, in turn, could cause you to make potentially devastating decisions about your business’s direction.
Other types of revenue besides operating revenue
As we stated earlier, not all money coming into your business is considered revenue. And revenue itself can take many forms, not just operating revenue. Here’s a look at some other types of business revenue and non-revenue.
Not all revenue that comes into your business is from your primary business activity. Therefore, not all revenue can be considered operating revenue. Revenue that is not considered operating revenue is instead classified as non-operating revenue. In the examples earlier:
Contributions from donors and sales of services were non-operating revenue for the retail business.
Sales of merchandise and sales of services were non-operating revenue for the nonprofit organization.
Contributions from donors and sales of merchandise were non-operating revenue for the preschool.
There are other types of non-operating revenue that can impact your profit and loss statement:
Sale of assets (buildings, vehicles, equipment, etc.)
Income from the settlement of lawsuits
All these examples of non-operating revenue have two things in common:
They are not produced from the primary business activity of the company.
They are sporadic and not expected as part of your business’s income on a regular basis.
Non-operating revenue in your financial statements
Non-operating revenue is typically found toward the end of your profit and loss statement, below operating income and above net income/profit (the “bottom line”). This allows you to clearly see your business’s financial position from operating activities, prior to the impact of non-operating revenue.
Non-revenue cash inflows
Not all cash that comes into your business is from operating revenue or non-operating revenue. Investments from shareholders, contributions of cash from owners, and loan proceeds are all examples of non-revenue cash inflows.
You can find all your operating and non-operating expenses on your profit and loss statement. Non-revenue cash inflows, on the other hand, are found on the balance sheet. And the impact all the different cash inflows—operating revenue, non-operating revenue, and non-revenue—has on your business’s cash balances is found on the statement of cash flows.
Operating revenue: The bottom line
Revenue is the lifeblood of your business. Without revenue, you don’t really have a business at all. And although any money coming into your business is a good thing, in order to accurately gauge your business’s health you need to be able to quickly determine your operating revenue.
Operating revenue is what your business makes from its primary income-generating activity. Because all businesses are different, what is operating revenue for your business might be non-operating revenue for the business in the office next to yours.
You can easily find your operating revenue on your profit and loss, or income, statement. It might go by another name like “total income,” but regardless of what it’s called by your accounting software package, it is the top line of your P&L after refunds are deducted.
As your business grows, non-operating revenue will likely impact the cash inflows in your business. It’s important to separate this revenue from your operating revenue in order to maintain a clear understanding of how your business’s primary income-generating activity is performing.
Operating revenue isn’t the only important metric in your business. Gross profit, operating income, and net income all tell you slightly different things about the health of your business. Your accountant or bookkeeper can help you track trends in these metrics, as well as provide guidance on the ones which are most important for you to focus on at your stage of business.
4 tips to find the funding that fits your business
The facts are clear: Startups are finding funding increasingly difficult to secure, and even unicorns appear cornered, with many lacking both capital and a clear exit.
But equity rounds aren’t the only way for a company to raise money — alternative and other non-dilutive financing options are often overlooked. Taking on debt might be the right solution when you’re focused on growth and can see clear ROI from the capital you deploy.
Not all capital providers are equal, so seeking financing isn’t just about securing capital. It’s a matter of finding the right source of funding that matches both your business and your roadmap.
Here are four things you should consider:
Does this match my needs?
It’s easy to take for granted, but securing financing begins with a business plan. Don’t seek funding until you have a clear plan for how you’ll use it. For example, do you need capital to fund growth or for your day-to-day operations? The answer should influence not only the amount of capital you seek, but the type of funding partner you look for as well.
Start with a concrete plan and make sure it aligns with the structure of your financing:
- Match repayment terms to your expected use of the debt.
- Balance working capital needs with growth capital needs.
It’s understandable to hope for a one-and-done financing process that sets the next round far down the line, but that may be costlier than you realize in the long run.
Your term of repayment must be long enough so you can deploy the capital and see the returns. If it’s not, you may end up making loan payments with the principal.
Say, for example, you secure funding to enter a new market. You plan to expand your sales team to support the move and develop the cash flow necessary to pay back the loan. The problem here is, the new hire will take months to ramp up.
If there’s not enough delta between when you start ramping up and when you begin repayments, you’ll be paying back the loan before your new salesperson can bring in revenue to allow you to see ROI on the amount you borrowed.
Another issue to keep in mind: If you’re financing operations instead of growth, working capital requirements may reduce the amount you can deploy.
Let’s say you finance your ad spending and plan to deploy $200,000 over the next four months. But payments on the MCA loan you secured to fund that spending will eat into your revenue, and the loan will be further limited by a minimum cash covenant of $100,000. The result? You secured $200,000 in financing but can only deploy half of it.
With $100,000 of your financing kept in a cash account, only half the loan will be used to drive operations, which means you’re not likely to meet your growth target. What’s worse, as you’re only able to deploy half of the loan, your cost of capital is effectively double what you’d planned for.
Is this the right amount for me at this time?
The second consideration is balancing how much capital you need to act on your near-term goals against what you can reasonably expect to secure. If the funding amount you can get is not enough to move the needle, it might not be worth the effort required.
What to keep in mind when updating your business plan
Did you know updating your business plan should be a part of your regular business practices? If not, don’t worry — a lot of people skip this step. But it could benefit you to make this effort.
Read on to learn why updating your business plan is so important, how to tackle this task, how often you should make updates, and key things to keep in mind.
Let’s get to it!
Why should you update your business plan?
Outside of updating your business plan as a standard course of doing business (which we’ll discuss in detail shortly), there are a few noteworthy situations that warrant a full business plan overhaul:
You need to raise funds
If you need capital to make tech upgrades, grow your team, or expand operations, you’ll likely need to raise funds. Before you can reach out to new investors, however, your business plan must be up-to-date and reflect your company’s current financial situation, including operating costs, cash flow, business goals, and income projections.
Related: 10 small business funding options
You want to refinance
Similar to potential fundraising moves, refinancing your business loans requires an updated business plan because it outlines operating costs, your company’s challenges, and forecasted revenue. No lender will entertain refinancing or even new loans without an updated business plan and financials.
You want to launch a new product
Big business moves necessitate an updated business plan and launching a new product or service qualifies. A new product means new potential revenue, so updating your business plan to reflect that fresh revenue stream is critical. Be sure to include everything you would’ve when writing your business plan the first time around — like costs, vendors, time frames, target demographic/segmentation, and financial projections.
You want to expand your company
Company expansion can take many forms. Perhaps you’d like to open up a second location in another city. Maybe you want to purchase more warehouse space for your products. Large technological upgrades are considered expansions, too. No matter what type of growth you have in mind for your business, updating your business plan to reflect this intention to grow is a key step before reaching out to investors and potential lenders.
You’ve changed your supply chain
Supply chain issues have become an acute problem since 2020. However, there has always been a need to update business plans to reflect changes in the supply chain and/or a change in the vendors you decide to use. Any time you make changes to your vendor list, put updating your business plan on your schedule.
You have new competitors
If a new major competitor enters your industry, it’s likely to affect how you do business. Whether that means your share of the industry “pie,” so to speak, decreases, or it means a new brand changes the expectations for your industry and you need to now follow suit — a business plan update is in the cards to reflect these changes.
When and how often should you update your business plan?
As you can likely see by now, updating your business plan is an essential part of having a business plan in the first place.
It’s a dynamic document that needs to be updated to meet where your business is at right now.
Though you don’t need to update your business plan to reflect every little change, making regular updates is a solid business practice.
If your company is chugging along with no major changes, giving your business plan the once-over at least once a year should be sufficient for updating financial data and projections. However, if your company undergoes a major shift, you’ll want to update your business model when you expect that change to occur.
How to update your business plan
Now that you have a sense of how often you should update your business plan and why you need to do so in the first place, let’s turn our attention to the real meat of this article: how to update your business plan. Here are six key things to keep in mind when updating this most important document.
1. Make updating your business plan part of your regular review process
One of the biggest obstacles to updating a business plan is scheduling the time to do it. Business owners are busy people, and it’s all too tempting to leave these sorts of tasks until tomorrow. However, you can get around this by simply incorporating a business model review into other processes you already complete.
If your company does quarterly financial reviews, add in a business plan review during this time. You’ll already be taking time away from day-to-day business operations to complete the financial review, so you might as well spend a couple of extra hours updating your business plan.
You could even schedule it for when you do your taxes or prep documents to send to your accountant. Add the business plan update to your to-do list for those days.
2. Include your team in the process
If you have any kind of team for your business, you must include them in this process. They are likely involved with the day-to-day functions of operating your business and can provide key insights into what the future of your company looks like. For example:
- Ask the marketing team for reports on trends they’ve noticed over the past six months or so.
- Ask sales about any demographic shifts they’re noticing in the customer base.
Those who are doing work within your industry daily are going to feel the subtle shifts within the market before anybody else. And they might have insights into what projections look like — things that you might not come up with on your own.
Leveraging your team means getting a more complete picture of what your company has accomplished, how it’s currently positioned, and where it will go from here.
Pro tip: You can manage these tasks directly in Microsoft 365 as well. Sharing documents is a snap and you can collaborate on your business plan in real-time.
3. Note regulatory changes
When updating your business strategy, take some time to research any regulatory changes that have taken place in your industry. New rules, regulations and laws are passed all the time and many can have a direct impact on how you do business.
For instance, payment processors now must report your earnings to the IRS. This change could affect how you report income and change your relationship with contractors. The implementation of sales tax on internet sales made in the state where your business is located is another example from the past that had a profound effect on companies doing business online.
Such changes can impact your financial reporting and/or make your business more competitive, and less competitive, and otherwise change your approach to how you do business.
4. Note vendor/supply chain changes
Another factor to take into consideration when updating your business plan is any vendor or supply chain issues or changes that have occurred since your last plan update. If a vendor suddenly changed their billing system or adjusted their fees, you might need to account for this in your business plan as it could cut into your profit margin projections.
Or, if the supply chain has made it so you need to use multiple vendors to meet your company’s needs without experiencing disruptions, your business plan should make note of this change — and even indicate that supply chain issues are an ongoing problem.
5. Keep broader economics in mind
The overall state of the economy can directly affect your company’s performance. And while economic downturns can leave some industries untouched, it’s rather rare. But even if your company is lucky and hasn’t been affected by broader economic fluctuations as of yet, keep updating your business plan on your radar.
The economy as a whole can impact your vendors, shipping, packing, contractors and other services related to how you do business. It can also affect staffing and the accessibility of talent. So even if your company hasn’t experienced negative effects, acknowledge the general state of the economy in your business plan and include contingency plans should issues arise.
6. Follow demographic changes
We’re currently in the midst of huge demographic changes in the United States and all over the world, which will have a direct impact on how you do business and what the future might bring to your company.
As of 2022, the median income among the middle class is going down, the income of the very wealthy continues to go up, and the median age of workers is going up, too. People are having babies later in life and at lower rates than in the previous generation.
All of these factors can directly impact your revenue potential as well as who your target demographic or ideal customer even is. And this means you need to update your business plan to account for these shifts. Continue to revisit demographic data and projections a couple of times per year to ensure your internal projections still apply and to see if your processes need updating and track your actual results. If so, a business plan update is in order, too.
What to do next
If you haven’t even so much as glanced at your business plan in a bit, now’s the time to dust off the document and give it a once-over. Times are changing — seemingly faster than ever before — so it would behoove you to set aside some time to update your business plan sooner rather than later.
Build your own brand (and stop reselling!)
I used to think that every “brand” was supported by its own factory and an army of in-house employees. I was wrong. Branding your own product doesn’t mean you need to design and manufacture it yourself.
Of course, most brands partner with factories, freelancers and agencies for extra support. But many others use white label designs straight from a factory. Here’s how it works:
- You find a manufacturer with a product design you like
- Add your brand name on it
- Sell it as your own
Sometimes there’s simply no need to design a product from scratch. There are plenty of well-designed products out there that just need a brand to sell them.
Where can you source white label products?
You can use sites like Alibaba and AliExpress to find pre-designed products ready for your brand name. No need to invest in product development, which can take months (or sometimes years) before a final sample is ready for production.
This Reddit post shows you how to use Alibaba or AliExpress to build your own brand step-by-step with just $1,000, a little imagination and a healthy amount of drive and ambition.
White labeling gives you so much freedom compared to reselling other brands’ products.
It can be the stepping-stone you need to put your brand on the map — even if you do end up reselling in the future or invest in R&D for products down the line.
1. Building your own brand means having control
When you buy stock from other brands to resell on your website, you’re not in control. They are able to dictate things like:
- The price you pay
- Whether you can discount it and for how much
- How you can and can’t market it
When you start your own brand, you have control. If you source directly from a factory, you can afford to drop prices to undercut competitors, while still making large margins. The tough design decisions have already been made, but you still get to make the product yours by customizing its look and adding your branding.
Where the brand goes in the future is up to you — it’s your adventure!
2. It reduces competition
Selling other brands’ products seems like an easy way to get rich. But often, you end up competing against other companies selling the exact same products. It’s not easy.
When starting your own brand, you’re the only one selling the products with your name on them, so you can build your own reputation.
For example, if I sell Beats headphones, I have to compete against all the big names already selling them. Those bigger companies can undercut me because they buy the headphones in bulk, which means they can sell them at a cheaper price.
So without competitive pricing, I could be crowded out of the market altogether. There’s just no way for a one-person company to achieve meaningful success by selling Beats headphones.
That said, if I launch my own brand of headphones called Nick’s Brilliant Headphones, I’ll still be competing against other companies making headphones. However, I’ll be the only person in the world selling Nick’s Brilliant Headphones.
With proper branding, some good reviews and the ability to maintain a good reputation, I could be on my way to the top.
3. It’s a stepping-stone to success
Perhaps you’ve heard of the popular saying, “Mighty oaks grow from little acorns.” The understanding of this quote means that sometimes something grand can stem from a small venture.
It doesn’t matter if you start out selling water bottles you bought on Alibaba, then rebrand them in your living room. After all, Jeff Bezos started Amazon out of his home.
The biggest brands have humble beginnings. There’s no telling how far you’ll take your brand once you get off the ground.
You could be importing en-masse from factories this year, developing your own products the next and building your own factory in five to ten years. As your brand reaches more people, it’ll gain recognition and loyalty. You’ll be able to take the brand wherever you want from there.
Importing products and adding your brand name to them may seem primitive, but it’s the first step to success and ownership over your future.
4. You can become the distributor
Today, you might approach Beats by Dre to resell their products. But instead, imagine if people approached you to sell your product?
You still get a cut of every sale, but you also get the following perks:
- Increased brand exposure
- Added benefit of a new revenue stream
- No burden of selling to customers all by yourself
You can go from begging other brands to let you work with them to the person whose products everyone else wants to stock.
I know several companies whose products are stocked in brick-and-mortar stores — and they all tell me it adds cushy extra income. There are always people who prefer to shop in a store or buy important last minute purchases in-person so they don’t have to wait for delivery.
5. Increase profits by cutting out the middlemen
If you resell products from an existing brand, you pay a wholesale fee to them. This helps cover their margin, plus the cost of the product, but may leave you with a lower profit.
If you start your own brand and sell it online, you only pay the manufacturing costs and any import and shipping fees.
That wholesale fee you would’ve paid another brand is money in your pocket.
You can then afford to undercut other sellers of similar products, while still maintaining a great margin.
It’s time to build your own brand
There are many merits to selling other people’s products. But the advantages speak for themselves when you have:
- Personal drive to start and build your own brand
And with white labeling, it’s easy to get started with a small investment.
Save the time and effort of marketing someone else’s products and promote your own instead. It could be the start to your brand becoming a household name.
Have thoughts on building a brand? Share them in the comments!
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