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Running a successful startup is challenging work. You have to manage employees, meet with investors, and generate brand recognition, all while building a loyal client base. But you also need to think about building sustainable growth through sound financial planning.
For many early-stage startups, this last part is vital. Although learning how to navigate the financial metrics may seem a little daunting initially, understanding just a few fundamentals can make things much more manageable.
According to Zippia, it takes a startup three to four years to turn a profit. As a founder, you need the skills to discern when the numbers are finally in your favor.
Whether you’re seeking to improve your financial forecasting or to pique the interest of potential investors, knowing the difference between operating income vs. revenue is essential.
Let's dive into the details of these financial terms and learn how to calculate them properly.
Operating income definition
Operating income, or operating profit, represents how much money you have left after deducting operating costs from gross income. Common operating expenses include recurring business costs, such as utilities, rent payments, payroll, 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 costs that occasionally crop up, 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 strategical plans.
Calculating operating income formula
Once you’ve determined your gross income 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.
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.
Definition of revenue
First, make sure you know the difference between revenue and income, as these terms are often confused. While revenue is the money your startup makes over a specific period, income (or net income) equals revenue minus operational expenses, depreciation of goods, labor costs, taxes, and other deductions.
To calculate revenue, you add up all transactions generating funds for your startup. Aside from money earned from selling goods and services, revenue may include royalty payments, processing fees, monthly subscription payments, or selling company-owned assets.
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 businesses generate all their money from selling goods or services, others earn revenue from sources that are not directly associated with day-to-day transactions. The difference between these two types of revenue is known as operating and non-operating revenue.
Here’s a quick breakdown of what these terms mean.
Operating revenue
This revenue comes from money 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 businesses.
Non-operating revenue
Whenever your startup makes money from activities outside your main revenue streams, this is known as non-operating revenue.
In many cases, non-operating revenue is more sporadic than operating revenue and is less reliable as a consistent source of earnings.
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.
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 income before subtracting the cost of goods sold (COGS), salaries, and other expenses incurred to keep operations running.
Meanwhile, operating income is the total amount earned after accounting for operating expenses like COGS, labor, administration, insurance, and other costs. 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 profit.
How to use operating revenue vs operating income metrics in decision-making
These two simple metrics can provide an enormous amount of valuable information to any business. By comparing and contrasting revenue vs. operating income, you’ll discover your startup's financial health and develop accurate estimates regarding your company’s future trajectory.
For example, tracking your revenue over several months may reveal that sales 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 financial 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.
Before long, you’ll begin to recognize potential financial opportunities the moment they arise, allowing you to grow your startup with greater confidence and more momentum.
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