In everyday business operations, monitoring operating cash flows is critical. While income statements show profits, they don’t always reflect the actual cash position. That’s why the operating activities section of the cash flow statement becomes a vital tool.

Operating activities are those business functions that relate directly to revenue generation sales, purchases, payments to employees and suppliers, and other routine expenses. This section gives business owners, CFOs, and accountants a clear view of whether the company is generating enough cash from its regular operations to sustain itself. 

What Is Included in Operating Activities? 

Operating activities typically include: 

• Receipts from customers 
• Payments to suppliers 
• Salaries and wages 
• Rent and utility payments 
• Tax payments 
• Other overheads directly linked to day-to-day operations 

These are the actual cash inflows and outflows that occur during the regular business cycle. Managing these transactions effectively ensures smoother operating cash flows and better control over liquidity.

Methods of Reporting: Direct vs. Indirect 

There are two methods to prepare the operating activities section in the cash flow statement: 

1. Direct Method (Cash-Based) 

This method lists all major operating cash transactions directly. It is straightforward and provides a clear picture of actual cash movements. 

In business use: 
Companies using real-time cash accounting (e.g., retail, hospitality) prefer this to track daily liquidity positions. 

2. Indirect Method (Accrual Adjustments) 

This method starts with net profit (from the Profit & Loss Statement) and makes adjustments for: 

• Non-cash expenses (e.g., depreciation) 
• Non-operating items (e.g., profit/loss from asset sale) 
• Changes in working capital (e.g., receivables, payables, inventory) 

Practical Adjustments Explained:  https://rmpsco.com/cash-flow-from-operating-activities/

Mini Case: Sales Growing, Cash Shrinking? 

A trading company shows ₹20 lakhs in profit but has negative ₹5 lakhs cash from operations. On review, it turns out: 

• ₹12 lakhs are stuck in receivables (slow collections) 
• ₹4 lakhs invested in excess inventory 
• Expenses prepaid for next quarter 

Even though profit appears healthy, operating cash is tight. Without timely action, the business could struggle to pay vendors or salaries — a real risk masked by accounting profits. 

Practical Checklist for Monthly Cash Flow Review 

Final Thoughts 

Focusing on operating activities helps businesses maintain a strong grip on day-to-day financial health. Whether using the direct method for cash visibility or the indirect method for accounting compliance, linking cash flow to real transactions builds clarity. 

By applying this guide, businesses can improve working capital, make smarter decisions, and stay financially resilient through routine review and discipline. 

This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMP Global or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.