Category: 

What Are Operating Activities?

Operating activities have a direct impact on the cash flow of a business.
Operating costs include supplies needed to ship items.
Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 September 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Bill Clinton met John F. Kennedy when he was 16.  more...

September 2 ,  1666 :  The "Great Fire of London" burned down more than 13,000 buildings, including St. Paul's   more...

Operating activities are all events and transactions that have a direct impact on the flow of cash into and out of a business. Identifying and properly categorizing various types of operating activities is essential to the process of calculating the net income generated by a business for a given period of time. Since both cash inflows and cash outflows are involved, managing these operating activities to best advantage must take place in order to earn a profit and ensure the future operation of the company.

Cash inflows are any type of operating activities that bring money into the business. The most common example of a cash inflow is the income that is generated by sales of the goods and services offered by the business. Here, attention is paid to determining pricing for products offered that will appeal to consumers, be competitive with the prices offered by other businesses who produce similar goods and services, and allow the business to earn an equitable amount of profit from each unit sold.

The generation of other forms of income also qualify as operating activities. When shares of stock issued by the business are sold, this creates revenue that flows into the company, and helps to increase the stability of the operation. In like manner, any returns that are earned on investments are considered operating activities.

Ad

Along with cash inflows, cash outflows are also operating activities. The cost of raw materials, advertising and marketing efforts, depreciation of equipment, deferred tax, amortization, and building inventory are all factors that impact the net income of the operation. Expenses that relate to the processes of sending out invoices, collecting payments on those invoices, and referring delinquent customer accounts to a collection agency are also considered examples of cash outflows. Even factors such as shipping costs, wages and salaries to employees, costs of benefits, and equipment purchases are included.

By identifying all operating activities associated with a given operation, it is much easier to determine if a business is operating at a profit, or if the company is headed for financial trouble. Deducting all outflows from the amount of inflows for the same period makes it possible to determine if the business is increasing its net income over time, or if profits are slipping from one period to the next. Making this assessment on a continual basis can often help a business identify areas where costs have increased or sales have decreased, and take action to reverse the unfavorable trend.

Ad

More from Wisegeek

You might also Like

Discuss this Article

fingered
Post 2

@pennywell - Good call! I think it's a good practice to continue updating the cash flow statement through the month. That way you'll always have a clear idea of how revenues are faring and if there's a change in cash flow from certain operating activities, it's easy to pinpoint the exact cause.

pennywell
Post 1

I definitely agree with the last part of this article where it mentions constantly assessing operating activities and cash flow. If you ignore it for even a little while, it can be quite hard to play catch up! The best way is to use a cash flow statement. It looks a bit complicated at first but there are plenty of templates and tutorials online that help explain how to get started. Once you do the first month's logs, it's not so bad after that.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email