Operating Activities

What Are Operating Activities?

Operating activities are the functions of a business directly connected with providing its goods as well as services to the market. These are the company's core business activities, like manufacturing, distributing, marketing, and selling a product or service. Operating activities will generally give the majority of a company's cash flow and to a great extent determine whether it is productive. A few common operating activities include cash receipts from goods sold, payments to employees, taxes, and payments to providers. These activities can be found on a company's financial statements and in particular the income statement and cash flow statement.

Operating activities are distinguished from investing or financing activities, which are functions of a company not directly connected with the provision of goods and services. Instead, financing and investing activities assist the company with functioning ideally over the longer term. This means that the issuance of stock or bonds by a company are not considered operating activities.

Key operating activities for a company include manufacturing, sales, advertising, and marketing activities.

The Basics of Operating Activities

Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as broad administrative and maintenance activities. The operating income displayed on a company's financial statements is the operating benefit remaining subsequent to deducting operating expenses from operating revenues. There is regularly an operating activities section of a company's statement of cash flows that shows inflows and outflows of cash resulting from a company's key operating activities.

In the event of vagueness, operating activities can promptly be distinguished by classification in financial statements. Many companies report operating income or income from operations as a specific line on the income statement. Operating income is calculated by subtracting the cost of sales (COGS), research and development (R&D) expenses selling and marketing expenses, general and administrative expenses, and depreciation and amortization expenses.

Operating income rejects interest income or expenses. For instance, an apparel store's operating activities could include the following:

• Buying materials from providers and paying for labor to create clothing
• Paying to move the materials to the factory and the garments from production lines to warehouses
• Arranging transport from warehouses to retail stores and mail-request clients
• Paying employees to work in warehouses and retail stores
• Paying managers to administer operations
• Paying taxes
• Paying rent on warehouse and retail facilities

Other more uncommon operating activities include fines or cash settlements from lawsuits, refunds and money collected from insurance claims.

Operating Revenues

The key operating activities that produce revenues for a company are manufacturing and selling its products or services. Sales activities can include selling the company's own in-house manufactured products or products supplied by different companies, as in the case of retailers. Companies that essentially sell services might possibly additionally sell products.

For instance, a spa business, as well as providing services like back rubs, may likewise look for extra revenue income from the sale of wellbeing and excellence products.

Interest and profit income, while part of overall operational cash flow, are not viewed as key operating activities since they are not part of a company's core business activities.

Operating Expenses

Expenses created from key operating activities include manufacturing costs, as well as the expenses of advertising and marketing the company's products or services. Manufacturing costs include all the direct production costs included in cost of goods sold (COGS).

Operating costs connected with advertising and marketing include the expenses of advertising the company and its products or services using different media outlets, whether through traditional or online platforms. Furthermore, marketing costs include such things as appearing at trade shows and participating in open events like charity pledge drives.

Operating Activities and the Cash Flow Statement

Cash flows from operating activities are among the major subsections of the statement of cash flows. It is separate from the sections on investing and financing activities. Investing activities allude to earnings or expenditures on long-term assets, like equipment and facilities, while financing activities are the cash flows between a company and its owners and creditors from activities like issuing bonds, retiring bonds, selling stock or buying back stock.

To get an accurate image of a company's cash flow from operating activities, accountants add depreciation expenses, losses decline in current assets and increases in current liabilities to net income, and afterward deduct gains, increases in current assets and diminishes in current liabilities. Investors examine a company's cash flow from operating activities separately from the other two components of cash flow to see where a company is truly getting its money.

Investors need to see positive cash flow due to positive income from operating activities, which are recurring, not on the grounds that the company is selling off the entirety of its assets, which brings about one-time gains. The company's balance sheet and income statement assist with rounding out the image of its financial wellbeing.

An Example of Cash Flow from Operating Activities

We should take a gander at the cash flow subtleties of the leading technology company Apple Inc. (AAPL). The iPhone maker reported the following for the fiscal year ended September 2017:

• Net income of $48.35 billion
• Depreciation, depletion, and amortization of $10.16 billion
• Deferred taxes and investment tax credit of $5.97 billion
• Different funds of $4.67 billion

Following the primary formula, the summation of these numbers brings the value for funds from operations as $69.15 billion. The net change in working capital for a similar period was (- 5.55 billion). Adding it to funds from operations gives the cash flow from operating activities for Apple as ($69.15 - $5.55) = $63.6 billion.

Features

• Cash flows from operations are an important measurement utilized by financial analysts and investors.
• Operating activities can be diverged from the investing and financing activities of a firm.
• Key operating activities for a company include manufacturing, sales, advertising, and marketing activities.
• Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as broad administrative and maintenance activities.