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.
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.
