Operating activities are the tasks and duties a business has to perform on an ongoing basis to earn an income. They are the core activities of a business and as a result, they affect the cash flow coming in and out, and determine the business’ net income.
In today’s article, we’ll discuss the types of operating activities, what to include in operating activities, and how operating activities and the cash flow statement are related.
What are the types of operating activities?
Operating activities are directly associated with a business’s various functions, such as manufacturing, selling, marketing, etc. Here are the types of operating activities:
Revenue-generating activities: Generating revenue is one of the chief goals of a business; therefore, the majority of business activities are activities that produce income. There are two primary activities that bring revenue to the business: selling products and providing services.
Marketing and advertising activities: These types of activities refer to your business’ actions regarding the promotion and advertising of goods and services. For example, you could hire a graphic designer to create promotional labels or packages. Or, if you want to push the promotions of your products, you’d need to hire a digital marketer to run a new ad campaign.
Administration activities: Administrative activities are tasks related to maintaining a business. These duties vary widely from workplace to workplace but most often include tasks such as purchasing materials, human resources, and basic accounting.
Maintenance activities: Maintenance activities are carried out regularly in order to keep your office neat, tidy, and functional. These activities include cleaning, visual inspection, functional tests, lubrication, measurement of operating quantities, and oil tests.
Customer service activities: Customer service is important to any business as it solidifies the relationship between you and your customers, which results in greater loyalty and more sales. Customer service activities include the support you provide via email, web, text message, and social media.
What to include in operating activities?
Operating activities are directly associated with a business’ principal goal: to sell its products or services. Through operating activities, businesses are able to generate income and make a profit. Therefore, these activities relate to transactions that affect net income.
The operating activities that result in cash inflows are:
- Cash receipts from sales
- Sales of shares
- Income earned from investment
- Settlements of lawsuits and insurance claims
- Collection of accounts receivable
- Supplier refunds
The operating activities that result in cash outflows are:
- Employee payments
- Supplier payments
- Tax payments
- Refunds to customers
- Settlements of fines and lawsuits
- Interest to creditors
- Equipment purchase
- Interest payment on loans and dividends
Operating activities and the cash flow statement
The cash flows from operating activities are one of the most important elements of the cash flow statement. Cash from operating activities is the money generated from the business’ core operations. It is distinct from the cash flows derived from investing and financing activities.
In contrast to cash from operating activities, cash from investing activities comes from sales and purchase of equipment and assets (tangible or intangible) and other capital expenditures. Cash from financing activities is the money your business gains from the procurement and repayment of short and long-term debt, issuance of equity, purchase/sale of treasury stock, payment of dividends, etc.
The cash flow can be either positive or negative. Having a positive cash flow is a good sign meaning that your business is thriving. On the other hand, having a negative cash flow might indicate that your business is facing trouble. To get an accurate picture of a company’s cash flow from operating activities, accountants add depreciation charges, losses, decreases in current assets, and increases in current liabilities to net income.
Business managers, owners, and investors review a company’s cash flow from operating activities separately from the other two components of cash flow to see the true source of a company’s money. A positive cash flow from operating activities for a continuous period means the company is going in the right direction and thriving. This is more important than a positive cash flow from investing or financing activities, which are one-time gains from selling assets or stocks.
The bottom line
Operating activities are the business’ core activities to generate income. Operating activities result in operating activities cash flow, the most important element of the cash flow statement.
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