What Are Operating Activities?

What Are Operating Activities?

Let me explain operating activities to you directly: these are the core functions of a business that focus on providing goods or services to the market. As someone who's looked into this, I can tell you they include manufacturing, distributing, marketing, and selling products or services. These activities generate most of a company's cash flow and are key to its profitability. You'll see common examples like cash from sales, payments to employees, taxes, and supplier payments right on the financial statements, especially the income and cash flow statements.

I want you to understand that operating activities differ from investing or financing ones, which aren't directly about goods and services. Those help the business in the long term, like issuing stocks or bonds, but they don't count as operating activities.

The Basics of Operating Activities

Operating activities cover the everyday tasks in producing and selling a product, generating revenue, and handling administrative and maintenance work. You can see the operating income on financial statements as the profit left after subtracting expenses from revenues. There's usually a section in the cash flow statement showing cash inflows and outflows from these activities.

If there's any confusion, just check the financial statements—they classify them clearly. Operating income comes from subtracting cost of goods sold, R&D, selling and marketing, general and administrative expenses, plus depreciation and amortization. It doesn't include interest. For instance, an apparel store's activities might involve buying materials, paying labor, transporting goods, paying warehouse and store employees, overseeing operations, taxes, and rent. Less common ones include lawsuit settlements, refunds, or insurance claims.

Operating Revenues

The main operating activities that bring in revenue are manufacturing and selling products or services. This could mean selling in-house items or those from suppliers, like retailers do. Service-based companies might sell products too—for example, a spa offering massages could also sell health products. Remember, interest and dividends are part of overall cash flow but not core operating activities, as they're not central to the business.

Operating Expenses

Expenses from these activities include manufacturing costs and those for advertising and marketing. Manufacturing covers direct costs in COGS. Advertising and marketing expenses involve media promotions, online or traditional, plus trade shows and events like fundraisers.

Operating Activities and the Cash Flow Statement

Cash flows from operating activities are a major part of the cash flow statement, separate from investing (like buying equipment) and financing (like issuing bonds or stocks). To calculate it accurately, accountants adjust net income by adding back depreciation, losses, decreases in assets, and increases in liabilities, then subtracting gains, asset increases, and liability decreases. Investors look at this to see real money sources, preferring recurring positive flows over one-time asset sales. The balance sheet and income statement complete the financial picture.

An Example of Cash Flow from Operating Activities

Take Apple Inc. for the fiscal year ended September 2017: they reported net income of $48.35 billion, depreciation and amortization of $10.16 billion, deferred taxes of $5.97 billion, and other funds of $4.67 billion. Adding these gives funds from operations at $69.15 billion. With a net change in working capital of -$5.55 billion, the cash flow from operating activities comes to $63.6 billion.