What Are Business Activities?
Business activities include any activity a business engages in for the primary purpose of making a profit. This is a general term that encompasses all the economic activities carried out by a company during the course of business. Business activities, including operating, investing and financing activities, are ongoing and focused on creating value for shareholders.
- Business activities are any events that are undertaken by a corporation for the purpose of earning a profit.
- Operating activities relate directly to the business providing its goods to the market, including manufacturing, distributing, marketing, and selling; they provide most of the company's cash flow and hugely influence its profitability.
- Investing activities relate to the long-term use of cash, such as buying or selling a property or piece of equipment, or gains and losses from investments in financial markets and operating subsidiaries.
- Financing activities include sources of cash from investors or banks, and the uses of cash paid to shareholders, such as payment of dividends or stock repurchases, and the repayment of loans.
Understanding Business Activities
There are three main types of business activities: operating, investing, and financing. The cash flows used and created by each of these activities are listed in the cash flow statement. The cash flow statement is meant to be a reconciliation of net income on an accrual basis to cash flow. Net income is taken from the bottom of the income statement, and the cash impact of balance sheet changes are identified to reconcile back to actual cash inflows and outflows.
Noncash items previously deducted from net income are added back to determine cash flow; noncash items previously added to net income are deducted to determine cash flows. The result is a report that gives the investor a summary of business activities within the company on a cash basis, segregated by the specific types of activity.
Operating Business Activities
The first section of the cash flow statement is cash flow from operating activities. These activities include many items from the income statement and the current portion of the balance sheet. The cash flow statement adds back certain noncash items such as depreciation and amortization. Then changes in balance sheet line items, such as accounts receivable and accounts payable, are either added or subtracted based on their previous impact on net income.
These line items impact the net income on the income statement but do not result in a movement of cash in or out of the company. If cash flows from operating business activities are negative, it means the company must be financing its operating activities through either investing activities or financing activities. Routinely negative operating cash flow is not common outside of nonprofits.
Investing Business Activities
Investing activities are in the second section of the statement of cash flows. These are business activities that are capitalized over more than one year. The purchase of long-term assets is recorded as a use of cash in this section. Likewise, the sale of real estate is shown as a source of cash. The line item "capital expenditures" is considered an investing activity and can be found in this section of the cash flow statement.
Financing Business Activities
The cash flow statement's final section includes financing activities. These include initial public offerings, secondary offerings, and debt financing. The section also lists the amount of cash being paid out for dividends, share repurchases, and interest. Any business activity related to financing and fundraising efforts is included in this section of the cash flow statement.