Operating Activities

Operating Activities

Operating activities are the core functions a business performs to produce and sell goods or provide services. They generate the majority of a company’s recurring cash flow and determine whether the business is profitable in its normal course of operations.

What counts as operating activities

Typical operating activities include:
* Cash receipts from customers for goods and services.
* Payments to suppliers for inventory and raw materials.
* Payments to employees (wages, salaries, benefits).
* Payments for rent, utilities, taxes, and insurance.
* Costs of production included in cost of goods sold (COGS).
* Advertising, marketing, and sales expenses.
* General and administrative expenses.
* Routine repairs and maintenance.
* Refunds, fines, insurance recoveries, and cash settlements related to normal operations.

Activities not considered operating activities include issuing or repurchasing stock, issuing or repaying debt, and buying or selling long‑term investments or fixed assets. Interest and dividend income are typically not part of a company’s core operating activities unless they arise from the company’s primary business.

Operating income vs. operating cash flow

Operating income (income from operations) is reported on the income statement and equals revenues minus operating expenses (COGS, R&D, selling and marketing, general and administrative expenses, depreciation and amortization). It excludes nonoperating items such as interest expense and one‑time gains or losses.

Cash flow from operating activities (CFO) appears in the statement of cash flows and shows actual cash generated or used by core operations. Investors and analysts look at CFO to assess whether a business produces sustainable, recurring cash flow rather than relying on one‑time gains or asset sales.

How cash flow from operating activities is calculated (indirect method)

Most companies use the indirect method to reconcile net income to operating cash flow. The typical adjustments are:
1. Start with net income.
2. Add back noncash expenses (e.g., depreciation and amortization).
3. Add losses and subtract gains that resulted from investing or financing transactions.
4. Adjust for changes in working capital:
* Subtract increases in current assets (other than cash) and add decreases.
* Add increases in current liabilities and subtract decreases.

In short:
Net income
+ Noncash expenses (depreciation, amortization)
+ Losses − Gains
+ Decrease in current assets − Increase in current assets
+ Increase in current liabilities − Decrease in current liabilities
= Cash flow from operating activities

Illustrative example

Using a simplified example, a company reports:
* Net income: $48.35 billion
Depreciation, depletion, and amortization: $10.16 billion
Deferred taxes and other operating adjustments: $10.64 billion (sum of items such as deferred taxes and other funds)

Summing these gives funds from operations of about $69.15 billion. If the net change in working capital is −$5.55 billion (a use of cash), cash flow from operating activities equals roughly $63.6 billion ($69.15B − $5.55B). This demonstrates how noncash charges and working capital changes move net income to cash flow.

Why operating activities matter

• CFO shows whether a company’s core business generates enough cash to sustain operations, pay dividends, service debt, and invest in growth.
• Positive and growing operating cash flow is generally a healthier sign than net income alone, because it reflects actual cash generation.
• Separating operating, investing, and financing cash flows helps investors understand the sources and uses of cash and evaluate business sustainability.

Key takeaways

• Operating activities are the daily functions that produce and deliver a company’s goods or services and generate recurring cash flows.
• Operating income measures profit from core operations; operating cash flow measures the actual cash generated.
• Use the indirect method to reconcile net income to cash flow from operations by adding noncash expenses and adjusting for working capital changes.
• Investors prefer consistent, positive operating cash flow because it indicates sustainable business performance.