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Starting A Business

What Is Operating Revenue?

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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.

Example 1:

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.

Example 2:

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.

Example 3:

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.

Non-operating 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.)

  • Interest income

  • Investment income

  • Income from the settlement of lawsuits

All these examples of non-operating revenue have two things in common:

  1. They are not produced from the primary business activity of the company.

  2. 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.

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Starting A Business

4 Tips for Starting an Industrial Business

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The industrial sector is a broad category that covers businesses involved in the manufacturing, production, and distribution of goods. Small industrial companies are growing across the country and there are many opportunities for entrepreneurs to get involved in this sector.

As with any type of business, there are certain things you need to do to set yourself up for success. Here are four tips for starting an industrial business:

photo credit: Pixabay

1. Do Your Research

Market research means figuring out who your target customers are and what they want or need. There are a number of different ways to do this, but some of the most common include surveys, interviews, focus groups, and observation.

Surveys can give you a good overview of customer opinions while interviews or focus groups can help you to delve deeper into specific issues. Observing potential customers in their natural environment can also be helpful in understanding their behavior and needs.

2. Choose the Right Niche

When it comes to starting an industrial business, one of the most important decisions you’ll make is choosing the right niche. There are a number of factors to consider when making this choice, and it’s important to do your research before settling on a particular industry.

First, you’ll need to identify the needs of your potential customer base, such as the products or services they need. Once you have a good understanding of the market, you can then start to narrow down your options. Consider the competition in each niche and decide which one offers the best opportunity for success. When making your final decision, it’s essential to choose a niche that you’re passionate about.

3. Create a Business Plan

In today’s competitive marketplace, it’s more important than ever to choose the right niche for your industrial business. When you specialize in a specific industry or type of product, you can better meet the needs of your target market and stand out from the competition. How do you know what niche is right for your business? Here are a few things to consider:

First, think about your strengths. What does your company do better than anyone else? What unique skills or experience do you bring to the table? Use these strengths to narrow down your focus and choose a niche that you’re passionate about.

Next, consider your target market. Who are you trying to reach with your products or services? What needs do they have that you can address? When you choose a target market and understand their needs, you’ll be better able to choose a niche that meets their demands.

Finally, don’t be afraid to experiment. Trying new things is essential for any business, so don’t be afraid to test out different niches to see what works best for you. By keeping these tips in mind, you can be sure to choose the right niche for your industrial business.

Engineers work with industrial printer

4. Optimize Your Processes

Through industrial control engineering, you will be able to identify opportunities for improvement and design solutions that achieve the desired results. In many cases, these solutions involve the use of automation and other advanced technologies.

By optimizing industrial business processes, industrial control engineers can help to improve efficiency and increase productivity. In addition, they can also help to improve safety conditions by reducing the potential for accidents. As industries continue to grow and become more complex, the demand for qualified industrial control engineers is likely to increase.

Endnote

With an increased demand for industrial operations and manufacturing, there has never been a better time to start an industrial business. By following these four tips, you can be sure to set your business up for success.

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How to Find the Right Business Coach — and Avoid the Wrong One

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At its best, business coaching can connect you with a mentor and supporter who helps you generate ideas, make plans and execute on them.

But at its worst, a business coaching offer can cost you time, energy and money — without much to show for it.

Here’s what to expect from a business coach, how to find a coach that suits you and how to spot red flags.

What a business coach can do

Business coaches draw on their professional experience to help you set and achieve your own business goals.

“I’m here to help you, and I’m here to raise your level of knowledge in whatever way I can,” says Gary Robinson, who chairs the Memphis, Tennessee, chapter of SCORE. SCORE offers free business mentoring for entrepreneurs nationwide.

Some ways a business coach or mentor might do this include:

  • Offering feedback on your ideas and suggesting new ones.

  • Giving you templates and other tools that help you make plans.

  • Connecting you with resources in your region or your industry.

  • Giving you deadlines and holding you accountable to them.

Some business coaches may also offer coursework or group training sessions on particular topics, like sales.

Working with a coach should help you identify opportunities you hadn’t seen before or develop new strategies for pursuing those opportunities, says Sophia Sunwoo, who coaches women and nonbinary entrepreneurs through Ascent Strategy, her New York City-based firm.

“[Coaches] don’t necessarily have to have all the answers,” Sunwoo says. “But they are the people that know how to maneuver and create a bunch of different thinking paths for their clients.”

What a business coach can’t do

A business coach isn’t the same as a consultant, whom you would hire to perform a specific task. A coach or mentor could look over your business plan, for example, but they wouldn’t write it for you.

“If you were to hire me as a consultant, you would expect me to roll up my sleeves and pitch in and work with you to get things done, and you would pay me for that,” Robinson says. Coaches, on the other hand, “try to show you how to do things so that you can do them [yourself].”

Business coaches are also not therapists, Sunwoo says. Entrepreneurship can be emotionally and mentally taxing, but it’s important that coaches refer clients to mental health professionals when necessary.

Business coaching red flags

If a business coaching opportunity “promises guaranteed income, large returns, or a ‘proven system,’ it’s likely a scam,” the Federal Trade Commission warned in a December 2020 notice.

In 2018, the FTC took legal action against My Online Business Education and Digital Altitude, which purported to help entrepreneurs start online businesses. The FTC alleged these companies charged participants more and more money to work through their programs, with few customers earning the promised returns.

In both cases, these operations paid settlements, and the FTC issued refunds to tens of thousands of their customers in 2021 and 2022.

To avoid offers like these, the FTC recommends that you:

  • Be wary of anyone who tries to upsell you right away or pressures you to make a quick decision.

  • Search for reviews of the person or organization online.

  • Research your coach’s background to see if they’ve accomplished as much as they say.

Sunwoo says to also be skeptical of one-size-fits-all solutions. A coach should customize their advice to your personality and skill set, not ask you to conform to theirs.

“The moment that a business coach pushes you to do something that is really not compatible with your personality or your beliefs or values,” Sunwoo says, “that’s a huge problem.”

How to find the right coach — maybe for free

Here’s how to find a coach that will be as helpful as possible.

Determine whether you need advice or to hire someone. A coach isn’t the right fit for every business owner. If you need hands-on help organizing your business finances, for instance, you may need a bookkeeping service or accountant. And take legal questions to an attorney.

Seek out the right expertise. A good coach should be aware of what they don’t know. If they’re not a good fit for your needs — whether that’s expertise in a particular industry or a specialized skill set, like marketing — they might be able to refer you to someone who’s a better fit.

Consider free options. There may be some in your city or region:

  • SCORE offers free in-person and virtual mentoring in all 50 states, plus Guam, Puerto Rico and other U.S. territories.

  • See if your city has a Small Business Development Center, Veterans Business Outreach Center or a Women’s Business Center. All are funded by the U.S. Small Business Administration and offer free training and advising for entrepreneurs.

  • Do an online search for city- or state-specific programs. Philadelphia, for example, offers a business coaching program designed for entrepreneurs who want to qualify for particular business loan programs. Business incubators often offer courses or coaching.

Make sure your coach is invested in you. They should take the time to learn about you, your business and its unique needs, then leverage their own experiences and creativity to help you.

“I’m on your team now,” Robinson says of his clients. “Let’s do this together and make this a success.”

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Are There SBA Loans for the Self-Employed?

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Many of the same SBA loans are available to both self-employed people and more formally structured businesses, such as limited liability companies and corporations. However, self-employed individuals, like sole proprietors and independent contractors, might face a higher barrier to entry for having limited credit history, inconsistent revenue or no collateral. If they can’t qualify for an SBA loan, other business financing options are available.

Who qualifies as self-employed?

Sole proprietors, independent contractors and partnerships all fall under the self-employed category. In these cases, there is no legal distinction between the business owner and the business itself. Sole proprietors, for example, are solely responsible for their business’s gains and losses, while LLCs and corporations are legally distinct from their owners. This distinction helps protect the owners’ personal assets if their business runs into legal or financial issues.

Are self-employed SBA loans hard to get?

While a sole proprietorship is much easier to set up than an LLC or corporation, lenders may be more hesitant to finance them for a few reasons:

  • Self-employed business owners are legally responsible, as individuals, for any debt and liabilities that their businesses take on. If someone sues their business, for instance, their personal assets — not just their business — could be at stake. This makes it riskier for lenders to finance them.

  • Sole proprietorships and independent contracting businesses may have lower revenue or less collateral to offer since they’re often a business of one. This could make it more difficult for them to prove that they can pay back the loan, plus interest. And it may require more paperwork.

  • Some banks set lending minimums that surpass what a self-employed business owner is looking for, either because the business owner doesn’t need that much funding or doesn’t qualify for it.

  • Since there is no legal distinction between the self-employed business owner and their business, they may lack business credit history. To establish business credit, you’ll want to register the business, obtain an employer identification number and open a separate business bank account and credit card to keep your business and personal finances separate.

SBA loans for the self-employed

SBA microloan: Best for small loans and more lenient requirements

Applying for an SBA microloan is a great option for self-employed business owners, especially if they’ve been turned down by traditional banks and don’t need more than $50,000 in funding. In fact, the average SBA microloan is around $13,000, according to the SBA. SBA microloans are administered by nonprofit, community-based organizations that can also help train applicants in business practices and management. And because the loans are small, the application process may be easier — applicants may have limited credit history and typically don’t need as high of a credit score as they do for an SBA 7(a) loan.

SBA 7(a) small loan: May not require collateral

Funds from the SBA’s most popular 7(a) lending program can be used for a variety of business-related purposes, such as working capital or purchasing equipment. While the maximum SBA 7(a) loan amount is $5 million, SBA 7(a) small loan amounts don’t exceed $350,000. And if the 7(a) small loan is for $25,000 or less, the SBA doesn’t require lenders to take collateral.

SBA Express loan: Best for quicker application process

SBA Express loans are a type of 7(a) loan for businesses that need quick financing and no more than $500,000. The SBA responds to these loan applications within 36 hours as opposed to the standard five to 10 days, which may speed up the process for borrowers working with non-SBA-delegated lenders. Additionally, borrowers might not have to fill out as much paperwork — the SBA only requires Form 1919. Beyond that, lenders use their own forms and procedures.

SBA loan alternatives

Online lenders

Self-employed business owners turned down for SBA or traditional bank loans may be able to qualify for financing with an online lender. These lenders offer options such as term loans and lines of credit, and they often process applications faster and have more lenient requirements. However, applicants should expect to pay significantly more in interest than they would with an SBA loan.

Business credit cards

Not only can business credit cards help build your business credit history and pay for everyday business purchases, but they can also help finance larger purchases (within your approved credit limit). And if you qualify for a credit card with a 0% introductory APR offer, you’ll have multiple months to pay off the balance interest-free. Just make sure you’re able to pay off your purchase before the intro offer ends and a variable APR sets in.

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