‍Operating income vs. revenue and how they affect your startup

‍Operating income and revenue are both key profitability metrics, but they’re not equivalent. Revenue refers to your top-line income before deducting any expenses, while operating income is what’s left after subtracting the cost of goods sold (COGS) and operating expenses.

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Let’s explore these terms in more detail, including how to calculate them, how they differ, and how they factor into decision-making.

Operating income definition

Operating income, or operating profit, represents the earnings from your core business operations. Specifically, it equals the money you have left after deducting operating costs from gross profit. Gross profit is simply revenue minus COGS.

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Common operating expenses include recurring business costs, such as utilities, rent payments, wages, shipping supplies, advertising campaigns, insurance premiums, inventory procurement, and maintenance.

In addition to these predictable expenses, it’s also important to include less frequent operating cost items, like annual software subscriptions, website domain fees, and office supplies.
Periodic travel for business meetings is another great example.

You can find operating income on the income statement and balance sheet.
From there, you can easily compare other data from different financial statements to create a better-balanced budget, among other strategic plans.

Calculating operating income formula

Once you’ve determined your gross profit and operating costs, subtract the difference between both to estimate operating income.
Naturally, if you notice gross income starting to outpace your operating expenses rapidly, it's probably time to consider scaling up operations.

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Use this simple equation to determine your startup’s operating income:

Gross Income – Operating Costs = Operating Income

For example, if your startup earned $27,000 during the month and had operating expenses of $18,000, your total operating income would be $9,000.
‍Note that this calculation specifically excludes non-operating expenses, like interest on debt and losses on the sale of real estate investments or other assets.

Definition of revenue

First, make sure you know the difference between revenue and income, as these terms are often confused. While revenue is the top-line earnings your startup generates over a given period, income measures usually factor in some amount of expenses. For example, net income equals revenue minus operational expenses, depreciation of goods, labor costs, taxes, and other deductions.
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To calculate total revenue, you add up all transactions generating funds for your startup. In addition to cash earned from selling goods and services, revenue may include royalty payments, processing fees, and monthly subscription payments.

Types of revenue

Now that revenue is clearly defined, it’s time to take a closer look at the sources of these earnings. While some companies generate all their cash from selling goods or services, others earn revenue from sources that are not directly associated with day-to-day transactions.

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These two types of revenue are known as operating and non-operating revenue. Here’s a quick breakdown of what these terms mean.

Operating revenue

This revenue comes from cash earned within the scope of your startup’s primary business model. For example, a startup with a SaaS business model generates operating revenue through subscriptions rather than the sale of tangible items. Meanwhile, an accounting firm may generate its operating revenue from services like tax preparation or bookkeeping for other companies.

Non-operating revenue

Whenever your startup makes money from activities outside your main revenue streams, this is known as non-operating revenue.

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In many cases, non-operating revenue is more sporadic than operating revenue and is less reliable as a consistent source of earnings.

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Suppose a gaming subscription service decides to relocate its HQ to another space and sell the old property. The proceeds from this sale fall under non-operating revenue since this transaction isn’t the startup’s conventional revenue stream.

Calculating revenue

To find your startup’s revenue, you multiply the average cost of a good or service by the number of times it was sold. Don’t forget to add up revenue from credit card transaction fees or convenience fees as well.
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Once you have this figure, be sure to include any sources of non-operating revenue like royalty payments, earned interest, or proceeds from selling owned assets (like unused computer equipment).

Operating income vs revenue: main differences to keep in mind

The financial stability of any startup depends heavily on discerning how operating income and revenue differ. Revenue reflects the total sales before subtracting COGS, salaries, and other expenses incurred to keep operations running.
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Meanwhile, operating income is the total amount earned after accounting for operating expenses like COGS, labor, administration, insurance, and other direct costs involved in running your business.
Knowing your revenue provides some insight into the overall earnings of your startup, and once you grasp your operating income, you'll be certain of your company's actual profitability.

How to use operating revenue vs operating income metrics in decision-making

By comparing and contrasting revenue vs. operating income, each key financial metric can provide an enormous amount of valuable information to any business. You’ll gain insight into your startup's operational efficiency and be able to develop accurate estimates regarding your company’s future trajectory.
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For example, tracking your revenue over several months may reveal that net sales after returns have increased by 25% over the previous quarter. However, after looking at operating income, you realize that the business costs have remained unchanged for the past four months.

With this information, you know you can hire a few extra workers to fill empty weekend positions, allowing you to accommodate even more customer transactions.

Wrapping up

Navigating profitability metrics like operating income or revenue is fairly easy. By remembering to separate gross income from operating and non-operating income, you can take greater control over your startup’s finances, dramatically improving your ability to make more informed business decisions.
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Before long, you’ll begin to recognize potential financial opportunities the moment they arise, allowing you to deploy resources more effectively and grow your startup with greater confidence.