Question

How important is the analysis of operating acitivities? What types of activites fall into this category? What do we learn about the company by analyzing these types of activities?

Answer 1

Operating activities refer to the activities performed with then the company for the day to day operations. This involves activities such as production marketing selling and Advertising. These activities are required for the operations of the business and without these activities the business cannot operate.

Analysis of the operating activities is extremely essential so that the business is able to make profits. If proper analysis of the operating activities is performed the operational expenses can be kept low which will increase the profitability of the business. For example a company has an operating expense ratio of 70% which leaves it with an operating income of 30%. The company can analyse its operational expenses and it may be able to pinpoint activities which are wasteful or overpriced. This will enable the business to reduce its operational expenses to may be 50% which will increase its operating income to 50%. Hence analysis of operating activities is essential to understand areas of improvement and improve the profitability of the business as a whole.

By analysing the operating activities we get to know the kind of activities required for the operations without which the company cannot function. We also get to know the areas where the cost can be reduced. We are also able to compare the expenses of this particular company with the industry standards and perform a ratio analysis to understand the weaknesses of the business.