here are three types of company activities: operational, investment, and financial. Such a distinction is necessary for a more precise definition of capital turnover in your company, in other words, to evaluate the effectiveness of the company's activities. How do these types of activities differ and on what aspects do they separate the movement of money?
The most significant activity in a company is operational. It includes all types of monetary funds spent on the daily tasks of your business. This includes all the one-time and regular expenses of the company.
Investment activity includes such operations with funds as purchases, sales, equipment maintenance, and enterprise property. For example, the costs of uniforms for staff, repair of the summer veranda of a cafe, etc. It can be distinguished by the characteristic of longevity, that is, these are time investments.
Financial activity is the receipt or issuance of loans. For example, issuing a loan to another company would be a financial activity because it does not affect the operational processes of the company issuing the loan.
Operational activity of the enterprise
In order to maintain its market position in conditions of fierce competition, the company monitors all market changes and develops various ways of adapting to negative impacts in order to affect competitiveness. The operational activity of the enterprise is aimed at making a profit and/or fulfilling other tasks of the enterprise, this may be providing a corresponding type of service, agricultural activity, production of industrial goods, leasing property, selling and transporting goods, and so on. In other words, it's what the company directly exists for.
A large portion of a company's human and financial resources go towards servicing this sphere, so the profit from it carries significant weight. For this reason, other types of company activity should not contradict the priority type of activity. The intensity of its development can indicate the stage of the company's life cycle.
Operational synergy occurs when companies merge in order to increase capital. A prime example of operational synergy is the merger of Exxon and Mobil. Their joint work brought in 80.3 billion dollars.
Main tasks of operational activity
The main goal of a company's operational activity is to identify the needs for its viability and further improvement. The company's operational activity includes all expenses necessary for the company's daily normal operation.
For example, you decided to open a service business - a mover's service.
The operational sphere of activity will include:
- office rental;
- advertising mover's services;
- profit from sales;
- payment of utility bills, internet;
- bank commission for servicing your accounts, etc.
Operational activity will not be related to:
- office reconstruction;
- website creation, etc.
Operational activity is the basis of a company's business activity. The principles of organizing operational activity include operating financial resources already invested in the enterprise. Funds that will be invested are the subject of financial and investment activities.
This means that the company's profit fully depends on the priority activity. If it is ineffective, the uncompetitive company will go bankrupt and leave the market.
All expenses incurred during the company's production cycle are operational.
The Production Cycle of the Enterprise
The period of time during which the turnover of the enterprise's material assets occurs is called the production cycle. In other words, the production cycle is the time it takes for a product or service to be produced, from the start of raw materials (raw materials and semi-finished products) into production to the output of the finished product. The production cycle is the main economic value when analyzing the activities of an organization. Its calculation is necessary for analyzing the work and further planning of the company's development.
The main indicator of the production cycle is its duration. Three main aspects influence it: technological, economic, and organizational.
For example, the time for assembly processes, processing, transportation of parts, workers' wages, the level of mechanization, and working conditions — all this has a significant impact on the duration of the cycle.
The shorter its duration, the more capital release we have at the output.
From this, it follows that, having calculated the duration of the cycle, you will be able to expand the production of goods or services in the organization and ensure its development and advantageous position in the market.
The duration of the production cycle affects the production capacity of the entire enterprise. Production capacity is the maximum number of products the enterprise can produce over a certain period. That is, the less time will be spent on producing one product, the greater the number will be produced during this period. Hence, the main task of the enterprise is to reduce the duration of the production cycle.
The Scheme of Profit Formation of the Enterprise
The sequence of stages of operational activity
To determine the turnover of the enterprise's funds, the operational activity can be divided into several stages.
The first stage of operational activity deals with the problems of managing and controlling the volume of resources for the business's livelihood, balance sheets, analysis of indicators of the enterprise's profit and loss report, and information from other sources for the corresponding period. An insufficient amount of resources will significantly lengthen the period of mastering production, while its excess can lead to irrational use of production raw materials.
The second stage of operational activity involves managing actions and events to organize the company's operations.
Main Types of Resources Expended for the Enterprise's Operational Activity
Resources are the factors of production used by humans, necessary for the normal functioning of production processes and their development.
Resources are divided into:
- Insufficient – resources whose capacity is less than required (for example, unskilled personnel, outdated equipment, machines);
- Limited capacity – resources whose load goes almost to the limit of their capacity, that is, without clearly planned work, they can become insufficient resources (an example can serve the tractor factory of the USSR, it was only an assembly place, parts came from other regions of the country);
- Excessive – resources whose power exceeds the need for them, that is, resources, with their continuous work, more services will be provided than needed, or goods will be produced in larger volumes than required (labor, capital, natural resources).
Bank's Operational Activity
The bank's operational activity is the activity aimed at obtaining resources and their competent use. What relates to operational activity? For example, the issuance of securities, monetary operations, and servicing of individuals and legal entities. Bank employees provide this activity. They perform the functions of the front office (responsible for carrying out relevant operations, controlling the drafting of contracts) and the back office (whose main activity is registration, verification of received documents, processing of client data and ensuring their safety, and interaction with tax authorities).
The main factor of the current operational activity is considered to be the bank's internal control. It is responsible for preventing system errors and preserving documentation. The system of internal banking control is divided into primary (visual inspection of documents) and subsequent (systematic inspection of documents). This activity is also a priority.
Cash Flows
The movement of money, including its inflow (receipt) and expenditure (outflow) is referred to as cash flow. The formation of cash flows originates from the company's funds from its official activities. This also includes interest and dividends.
The company's cash flows are calculated using two methods:
- Direct method — observation and analysis of the organization's cash flows (with this method you can find sources of expenses and income of the business);
- Indirect method — studying information about funds for a selected period using accounting reports (this method is most popular as it allows for a more complete description of capital movement).
Movement of Current Assets
Five main stages of current assets movement are distinguished:
- Capital is used to purchase raw materials for production activities;
- Raw materials turn into unfinished production (goods that have not passed all stages of the technological process, as well as those that have not passed testing, assembly requirements, and technical acceptance);
- The product (service) at this stage becomes finished;
- The results of production move to consumers;
- The company's product becomes capital again.
Investment Activity of the Enterprise
In addition to operational activities, investment, and financial activities are also carried out for the full development of the organization. Let's consider each of them separately.
Investment activity of the enterprise — the company's funds being invested for the sake of profit.
Investments can be divided into two groups.
- Real investments — money investments for profit. These are investments in a long-term project with the subsequent acquisition of assets. They use either their own capital or credit or other borrowed funds. Real investments are the basis of the organization's capital investments. Thanks to them, the enterprise penetrates new markets, and increases the level of profitability of operational activities. An example of such investments is the use of scientific activity, which will promote the enterprise, reconstruction, and reprofiling.
- Financial investments — capital investments to form a portfolio of securities. For example, the purchase of company shares, and securities.
Financial Activity
The financial activity of a company refers to short-term financial investments, issuing bonds and other securities, and so on. Companies make short-term investments with the aim of increasing revenues, financing current activities, mobilizing financial resources, and so forth.
An analysis of the financial activity of a company to evaluate business assets is carried out through financial control. There are main types of financial control:
- Preliminary: the main task of this check is to prevent violations of the law;
- Current: an analysis and review of activities is carried out;
- Subsequent: the company's expenses and income are checked, and violations of discipline are identified.
Interests and Dividends
A company operating in the market conducts transactions with its funds. Let's delve into interests and dividends. First, we need to understand the essence of each of these concepts.
Dividends are part of the profit of an organization that is paid to its owners (shareholders). By purchasing shares of a company, you earn profit from it, regardless of the company's reputation and its cash turnover. To receive dividends, you need to contact where your account was opened. The broker sends you a notification after receiving the funds. The received money can be transferred to your bank account or withdrawn and spent.
Interest is income earned as a result of any kind of debt obligation. For example, income received from cash deposits.
Both interest and dividends are included in the cash flows related to operational activities.
Profit Tax
When considering the topic of money turnover in business, special attention should be paid to profit tax. This is a direct tax levied on companies.
Profit tax is directly dependent on the net profit of the enterprise. It is paid at set intervals.
Tax payment is related to the operational activity of the company. It accounts for 20% of the organization's profit. For example, if your organization made a net profit of 70,000 rubles this month, the profit tax will be 20% of 70,000 rubles, that is, 14,000 rubles.
If you want to run your own business or improve the indicators of an existing business, the field of money turnover within the enterprise should definitely be studied by you. This will allow you to control income and expenses and develop the company.
