Operating ActivitiesActivities that a business performs to earn a profit

Patrick Louie

Date Published: September 21, 2022

The primary purpose of starting and operating a business is to generate profits.

Even better if the business is able to generate profits for each year of its existence.

But of course, the business has to do something before it can generate profits.

For example, a retail store will have to successfully sell its products first to earn revenue.

Then, whatever revenue it earns must be enough to cover all the expenses it incurs to make a sale.

If there’s an excess of revenue, that’s the time when the business earns a profit.

After all, profit isn’t something that just willingly comes to your door. You have to earn it.

Aside from the generation of profit, a business will have core activities that will help it achieve its purpose of earning profits.

Let’s go back to the retail store example above.

The selling of its products is one of its core activities.

After all, if a business is able to sell its products, it will revenue.

And revenue is where profit comes from.

Aside from that, there’s the maintenance of its stores (physical or online), acquisition of goods for sale, administration of its various functions, etc.

We refer to these activities as a business’s operating activities.

In this article, we will learn about what operating activities are.

What are they and what is their role in a business?

What is considered an operating activity and what is not?

Can a business still earn profits even if it doesn’t have operating activities?

We’ll try to answer these questions as we go along with the article.

What are Operating Activities?

operating activities

Operating activities are a business’s functions that relate to the act of making its products (goods and/or services) available to the market.

In other words, these are the activities that a business performs to earn revenue and ultimately, a profit.

These typically include a business’s core activities such as marketing, distributing, selling, etc.

If the business manufactures its own products, then manufacturing is also one of its operating activities.

A business’s operating activities will generally contribute a majority of its cash flows.

Aside from that, they typically determine whether a business makes a profit or not.

What is considered an operating activity will depend on the type of business, although there will be common ones across the different types.

For example, every business typically has an administrative function, which is an operating activity.

An easy way to determine whether an activity is an operating activity or not is to ask this question: does it contribute to a business’s daily operations?

If the answer is yes, then it’s probably an operating activity.

Aside from that, if an operating activity isn’t directly related to the generation of revenue, then it could be related to an administrative or maintenance function.

Not all operating activities directly generate revenue after all.

In a business’s financial statements, particularly the income and cash flow statements, a business’s operating activities are distinguished from its investing and financing activities.

The main reason for this is to make gauging a business’s operational performance much easier.

While investing and financing activities can contribute to a business’s profit generation, they are not a core part of its operations.

Hence, the need to segregate them when determining a business’s operational efficiency.

This means that the issuance of stocks or bonds does not count as an operating activity.

Examples of Operating Activities

Though a business’s operating activities may differ from another, they ultimately lead to one goal: the generation of profits.

That is not to say though that all operating activities directly contribute to the generation of revenue.

Some, or maybe even most of them actually produce expenses and cash outflow.

However, all operating activities are necessary to maintain the operations of a business, and more importantly, its profit generation.

Here are some examples of operating activities:

Revenue Generating Activities

These are operating activities that directly contribute to the revenue generation and cash inflow of a business:

  • Sales of a product or service
  • Collection of accounts receivable
  • Supplier refunds

While earning interest income isn’t typically an operating activity, it can be if it’s the primary way that a business earns revenue.

For example, a loan provider primarily earns its revenue from the collection of interest from the loans that it provides.

Marketing and Advertising

These are operating activities that promote that business’s products to boost sales.

These could also refer to activities that assess the business’s target demographic:

  • Promotion of a new product
  • Performing a market survey
  • Introducing promos or discounts to boost sales

Administrative and Maintenance Activities

These are operating activities that relate to the administrative and maintenance function of a business:

  • Human resources and development activities
  • Payment of employee salaries and wages
  • Maintaining the condition of the business’s stores (physical and digital)
  • Accounting activities
  • Budget preparation and implementation

Any revenue or expense that results from the activities above will contribute to the business’s operating income.

Operating Activities in the Financial Statement

operating activities

If you’re still unsure of what a business considers its operating activities, you can look at its financial statements, particularly its income and cash flow statements.

These two financial statements typically provide information about a business’s operating activities.

In some income statements, there’s a specific line for operating income or income from operations.

Any activity that contributes to the figures above this line is an operating activity.

The typical line items above operating are the following: revenue, cost of goods sold, and operating expenses.

In a typical cash flow statement, the cash flows are segregated into three categories: operating activities, investing activities, and financing activities.

Any activity that contributes to the cash flows in the operating activities section is an operating activity.

For example, cash flow from cash sales is typically a part of the operating activities section of a business’s cash flow statement.

Therefore, the act of selling is an operating activity.

Operating Activities and the Income Statement

An operating activity may either produce revenue or incur expenses.

In the income statement, operating activities that directly contribute to the generation of revenue will be typically included in the revenue section.

Sales activities will generate revenue. On the other hand, activities that the business performs to make its products available to the market will generate the cost of goods sold.

For example, if a business manufactures its own products, then the cost of manufacturing will eventually form part of its cost of goods sold.

Operating activities that don’t directly contribute to the generation of revenue will typically generate operating expenses.

As such, you’ll typically find them in the operating expenses section of the income statement. Such activities usually relate to administrative and maintenance functions.

Operating Activities and the Cash Flow Statement

A typical cash flow statement will have three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Any activity that contributes to the cash flows from operating activities section is an operating activity.

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  1. University of Minnesota "Cash Flows from Operating Activities: The Direct Method" Page 1 . September 21, 2022

  2. Harvard Business School "HOW TO READ & UNDERSTAND A CASH FLOW STATEMENT" Page 1 . September 21, 2022