What Are Operating Activities in a Business?
Operating activities are the core activities that a business performs to earn revenue. These activities affect the cash flow coming in and out and determine the net income of the business.
Some fundamental operating activities for a business are sales, customer service, administration and marketing. These activities are part of the normal functioning of a business that affects its monthly, quarterly and annual income and profits. They also provide the majority of the cash flow and determine profitability.
What this article covers:
- What Is Included in Operating Activities?
- What Is an Example of an Operating Activity?
- What Are the 6 Types of Business Activities?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is Included in Operating Activities?
The operating activities of a business are found in the business’ financial statements particularly the cash flow statement and the income statement.
The operating activities section in these statements is considered the most important section since it provides cash flow information related to the daily operations of the business and allows stakeholders to see the viability of the business. It also determines the business’ ability to pay its current expenses such as labor costs and debt repayment.
The operating activities that result in revenue generation are:
- Cash receipts from sales
- Sales of shares
- Income earned from investment
- Settlements of lawsuits and insurance claims
- Accounts receivables collection
- 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
In the statement of cash flows, the cash flow from these activities is listed in the operating activities section. They are focused changes in the current assets and current liabilities and the net income. Apart from operating activities, cash flow statement also lists the cash flow from investing and financing activities.
What Is an Example of an Operating Activity?
What is the main cash-generating activity of the business? There are two primary revenue-generating activities of businesses – providing services and selling products.
Marketing and Advertising
Operating activities include promotion and advertising of goods and services. For example, a tax accountant might organize introductory training sessions for small businesses at the local chamber of commerce.
Functions such as accounting, purchasing, human resources, purchasing, facility maintenance and information technology are included under operational activities.
Maintenance and Customer Service
The related expenses of customer service and facilities maintenance include rent, utilities, supplies, insurance and licenses.
What Are the 6 Types of Business Activities?
Regardless of their activities, the ultimate goal of any business is to maximize profits. Keeping this in mind, there are six types of activities that all businesses have to undertake at some point or the other.
The sales team is the lifeblood of every business. The sales team reaches out to the customers to expand the customer base and secure repeat sales.
Marketing and advertising help in developing the brand and boosting the exposure of the business and its services.
Budgeting and finance help in deciding how the revenue is to be utilized for growing the business and achieve optimum results.
The process of managing the money that goes in and out of your business falls on accounting. Keeping up to date with the expenditure and income allows you to ascertain where and how the money is spent.
5. Customer Service
Customer service helps in securing new clients, build lasting relationships and promote referrals for your business.
6. Human Resources
The human resources team is an essential part of maintaining current operations and planning for expansion. They are responsible for conducting interviews, hiring applicants, dealing with interpersonal conflicts and determining the benefit packages employees should receive.
Not every business activity is an operating activity. The principal operating activities include any cash flows that relate to the core or activity that business performs to earn a profit.
The reporting of operating activities helps in determining the focus of the business and its earning potential.