Operational Activities: The Engine Room of Business Success

Key Takeaways:

1. Operational activities are the core functions of a business, directly linked to its product or service provision.
2. The majority of a company’s cash flow and profit generation is largely determined by its operational activities.
3. Common operational activities include manufacturing, sales, marketing, advertising, and payments to employees, taxes, and suppliers.
4. Operational activities are distinct from investing or financing activities, which aim to optimize a company’s long-term function.
5. Operational revenues and expenses can be tracked in detail through financial statements, particularly the income statement and cash flow statement.

Introduction

In the business world, operational activities form the bedrock of a company’s day-to-day functions. These are the activities that align directly with a company’s core mission of providing goods or services to the market. From manufacturing to distribution, marketing to sales, operational activities are the nuts and bolts of any enterprise. They are the primary source of a company’s cash flow and determine its profitability.

Operational Activities: The Lifeblood of Business

A firm’s operational activities include everything it does to deliver its products or services to customers. For a manufacturing company, this might involve sourcing raw materials, manufacturing goods, distributing products, and managing warehouses. A retail business, on the other hand, may focus on buying products from suppliers, arranging transport from warehouses to retail stores, managing retail outlets, and handling customer service.

Payment-related activities such as employee salaries, taxes, and supplier invoices are also included in operational activities. In addition, other less common but equally crucial operational tasks might involve handling fines, cash settlements from lawsuits, refunds, or insurance claim money collection. In a nutshell, operational activities are the mainstay of a business, driving its revenue generation and expenditure.

Operational Revenues and Expenses

The central operational activities that generate revenues for a company revolve around manufacturing and selling its products or services. A company may generate revenue through the sale of its in-house manufactured products or services, or it may act as a retailer, selling products supplied by other companies. A spa business, for example, may primarily provide services like massages but also generate additional revenue through the sale of health and beauty products.

Conversely, expenses generated from operational activities include manufacturing costs, advertising expenses, marketing costs, and other direct production costs included in the cost of goods sold (COGS). These costs could also encompass expenses associated with advertising the company and its products or services through various media outlets, traditional or online. Marketing costs may include appearances at trade shows and participation in public events, among other things.

The Statement of Cash Flows: A Window into Operational Activities

A company’s statement of cash flows offers an in-depth look at the inflows and outflows of cash resulting from its key operational activities. This statement separates cash flows from operational activities from those resulting from investing and financing activities, providing a clear overview of where a company’s money is coming from and where it’s going.

Investing activities involve earnings or expenditures on long-term assets, like equipment and facilities, whereas financing activities relate to cash flows between a company and its owners and creditors, such as issuing bonds, selling stock, or buying back stock.

To obtain an accurate picture of a company’s cash flow from operational activities, accountants add depreciation expenses, losses, decreases in current assets, and increases in current liabilities to net income. They then subtract gains, increases in current assets, and decreases in current liabilities. This method allows investors and financial analysts to examine a company’s cash flow from operational activities separately from the other two components of cash flow. They can then better understand where a company is really sourcing its funds.

Operational Activities in Practice: A Real-World Example

For a concrete example of operational activities in action, let’s look at Apple Inc. (AAPL), a leading technology company. In the fiscal year ending September 2017, Apple reported:

• Net income of $48.35 billion
• Depreciation, depletion, and amortization of $10.16 billion
• Deferred taxes and investment tax credit of $5.97 billion
• Other funds of $4.67 billion

Adding these numbers together gives a total value for funds from operations of $69.15 billion. The net change in working capital for the same period was (-5.55 billion). So, the cash flow from operating activities for Apple was calculated as ($69.15 – $5.55) = $63.6 billion.

The Power of Operational Activities

In essence, operational activities are the backbone of a company’s business model. They generate the majority of a company’s cash flow and are pivotal in determining its profitability. Understanding and managing operational activities effectively is thus crucial for any business looking to thrive in today’s competitive marketplace.

From planning and organizing to directing and controlling, operational activities encompass all tasks that contribute to the production and delivery of a company’s goods or services. They are central to a business’s success and play a key role in its growth and sustainability. As such, they should be strategically managed to optimize efficiency, productivity, and profitability.