Continuing Operations

Continuing operations refer to a business’s activities that are continuous and ongoing since the issuance of the organization’s financial statements. Investors and analysts can compute income from such operations to get an idea regarding a company’s long-term performance.

Such activities constitute the core operations of any company, and they contribute to the primary income source. Companies will continue to carry out such activities even if the owner offloads their stake or retires. These operations show how well any organization is doing by conducting its primary activities. They exist in the case of both private and government organizations.

• Continuing operations refers to those activities carried out by the business that are continued or sustained indefinitely. This means these core operations will not cease to exist even if the business owner leaves the organization.
• A key difference between continuing operations and discontinued operations is that continuous operations are carried out daily. That said, discontinued operations are those activities that businesses do not conduct anymore.
• Some key benefits of efficiently conducting such operations are better quality control and decreased cost of production. 
• A noteworthy disadvantage of such activities is that they can reduce the flexibility of a system.

Continuing operations refers to a business’s ongoing business activities. Hence, they exclude non-recurring or one-time events, for example, extraordinary items, losses or gains generated from selling assets, and discontinued operations. Companies continue to carry out these activities even in the case of a business disruption.

Different financial statements, like an income statement, may separate the results obtained from the primary or core operations of the business from the results acquired from discontinuous activities. The purpose of this separation is to offer a clear picture of the organization’s ongoing financial performance. Analysts, stakeholders, and investors can assess a company’s core performance and growth potential with the help of the separation. Moreover, they can make well-informed decisions regarding its future prospects and compare the performance to the performance of other organizations within the same industry.

Typically, the primary or core operations of any business include the revenue earned from selling services and goods, operating expenses, cost of goods sold, and other income or expenses directly associated with the core activities of an organization. 

One can calculate income from continuing operations by deducting the expenses incurred to generate income via the core operations from the revenue earned from the operations carried out on a day-to-day basis. Note that this income is a line item appearing on a business’s income statement.

Also called operating earnings or income, the earnings exclude expenses and revenue that are irregular. For instance, let us say that a business sells a few of its assets to generate income. This income will not be a part of the revenue earned from core operations.

Also, one must note that when computing such income, businesses must exclude taxes and interest paid or earned.

Let us look at a few continuing operations examples to understand the concept better.

Example #1

Suppose Company ABC is a tire manufacturer that produces summer, winter, and all-season tires. It was preparing financial statements for the financial year 2023 and needed to calculate income from continuing operations. The operating expenses and cost of goods sold for that financial year stood at $50,000 and $200,000, respectively. It reported total sales of $300,000 from its daily operations. In this case, it can compute the income from core activities by using the formula below:

Income From Core Activities = Total Revenue from Daily Business Activities – (Operating Expenses + Cost of Goods Sold)

Thus, the required income will be $300,000 - $250,000, i.e., $50,000.

Example #2

A popular online personal styling service offeror in the U.S., Stitch Fix, recorded net revenue of $364.8 million from its continuing operations for the 1^st quarter of fiscal 2024. This figure marked an 18% drop on a year-over-year (YoY) basis. The chief executive officer of the company, Matt Baer, said that the quarter’s results are encouraging and the organization’s original vision remains compelling, powerful, and relevant.

According to him, the organization will keep focusing on optimizing its operations in the short term while reimagining the operating and business models with the objective of achieving profitable and sustainable future growth.

Let us look at the advantages of continuing or continuous operations.

• Such activities encourage the reduction of labor that is unnecessary and the increase in automation. Both reduce the production cost.
• Businesses can increase their production volumes by conducting their core activities efficiently and eliminating shutdown and start-up phases.
• When companies or organizations utilize streamlined processes in their core operations, they can spot issues related to the production process quickly. Decreased manual production also minimizes human error potential.
• Results obtained from such activities can enable investors and analysts to get an idea about a company’s future performance.

The disadvantages of a business’s core activities are as follows:

• Such operations can lead to the establishment of production systems with low flexibility. A fault in a production stage can halt or disrupt the whole process.
• Installing and purchasing the required machinery or equipment to carry out the primary business activities smoothly requires substantial capital. Moreover, organizations need to train employees so that they have the necessary skills to ensure that the operations run without any hassle. If organizations cannot ensure this, human resource costs will increase.  
• Businesses may end up excluding specific relative activities from their core operations.
• Such operations may not fully consider external factors that may impact the organization’s overall performance. These factors may include interest rates, geopolitical events, or tax regulations.

Although the names, continuing operations and discontinued operations suggest that they are different, people, especially the ones new to the world of business, are confused regarding their meaning. So, to help individuals steer clear of confusion, the table below highlights their key differences.

This has been a guide to what are Continuing Operations. We explain the income from it, its comparison with discontinued operations, examples, and benefits. You may learn more about financing from the following articles –

• Extraordinary Items
• Annual Financial Statements
• Non Operating Expenses