What Are Business Activities?
Business activities include any activity engaged in 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.
Understanding Business Activities
There are three main types of business activities: operational, investing and financing. The cash flows used and created by each of these activities are listed in the annual report within the financial statement referred to as the cash flow statement. The cash flow statement is meant to be a reconciliation of net income with cash flow. Each line item on the income statement and balance sheet is identified according to business activity. Noncash items deducted from net income are added back to net income; noncash items added to net income are deducted from cash flows. The result is a report that gives the investor a summary of both cash and noncash business activities within the company.
- Business activities are any events that are undertaken by a corporation for the purpose of earning a profit; they are typically classified as operating, investing or financing activities.
- 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; also, items that result from the gains or 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.
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 and deducts certain noncash items such as depreciation, amortization, accounts receivable and accounts payable. These line items impact the net income statement but do not result in a movement of cash in or out of the company. If cash flows from business activities resulting from operations are negative, it means the company must be financing operating activities with investing activities or financing activities.
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 is the financing activities section. This section provides an overview of all business activities related to financing. 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.