Definition of 'Operating Activities'
A company’s typical daily processes that generate income. Operating activities pertain to a company’s core business activities, such as manufacturing, distributing, marketing and selling a product or service. These activities should provide the majority of a company’s cash flow and will largely determine whether a company is profitable.
Investopedia explains 'Operating Activities'
For example, an apparel store's operating activities would include buying materials and paying for labor to produce clothing, paying to transport the materials to the factory and the clothes from factories to warehouses, arranging transport from warehouses to retail stores and mail-order customers, paying employees to work in warehouses and retail stores, paying managers to oversee operations, paying rent on warehouse and retail facilities, and more.
Operating activities along with a company’s investing and financing activities make up the statement of cash flows. Investing activities refer to earnings or expenditures on long-term assets, such as equipment and facilities, while financing activities are the cash flows between a company and its owners and creditors from activities such as issuing bonds, retiring bonds, selling stock or buying back stock.
To get an accurate picture of a company’s cash flow from operating activities, accountants add depreciation expenses, losses, decreases in current assets and increases in current liabilities to net income, then subtract gains, increases in current assets and decreases in current liabilities. Investors examine a company’s cash flow from operating activities separately from the other two components of cash flow to see where a company is really getting its money from. They want to see positive cash flow because of positive income from operating activities, which are recurring, not because the company is selling off all its assets, which results in one-time gains. The company’s balance sheet and income statement help round out the picture of a company’s financial health (or lack thereof).