Definition of business activities

What are business activities?

Business activities include any activity in which a business engages with the primary purpose of making a profit. It is a general term that encompasses all the economic activities carried out by a company within the framework of its activities. Business activities, including operating, investing and financing activities, are continuous and focused on creating shareholder value.

Key points to remember

  • Business activities are events that are undertaken by a company for the purpose of making a profit.
  • Operating activities are directly related to the business that brings its products to market, including manufacturing, distribution, marketing and sales; they provide the bulk of the company’s cash flow and greatly influence its profitability.
  • Investing activities relate to the long-term use of cash, such as the purchase or sale of property or a piece of equipment, or gains and losses from investing in financial markets and operating subsidiaries.
  • Financing activities include sources of cash from investors or banks, and uses of cash paid to shareholders, such as payment of dividends or redemption of shares, and repayment of loans.

Understand 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 statement of cash flows. The statement of cash flows is intended to be a reconciliation of net income on an accrual basis to cash flows. Net income is taken from the bottom of the income statement and the cash impact of balance sheet changes is identified to reconcile with actual cash inflows and outflows.

Non-monetary items previously deducted from net income are added back to determine cash flows; non-monetary 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, separated by 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 elements of the income statement and the current part of the balance sheet. The cash flow statement adds some non-cash items such as depreciation and amortization. Then, changes in balance sheet items, such as accounts receivable and accounts payable, are either added or subtracted based on their prior impact on the bottom line.

These items have an impact on the net income of the income statement but do not cause cash flow in or out of the company. If the cash flow from operating business activities is negative, it means that the company must finance its operating activities either through investing activities or through financing activities. Systematically negative operating cash flow is not common outside of nonprofit organizations.

Investing in business activities

Investing activities are included in the second section of the cash flow statement. These are commercial activities capitalized over more than one year. The purchase of long-lived assets is recorded as a use of cash in this section. Similarly, the sale of real estate is presented as a source of cash. The item “capital expenditures” is considered an investing activity and is found in this section of the statement of cash flows.

Financing of commercial activities

The last section of the cash flow statement includes financing activities. These include initial public offerings, secondary offerings and debt financing. The section also lists the amount of cash paid for dividends, share buybacks, and interest. All business activity related to fundraising and fundraising efforts is included in this section of the cash flow statement.

How is the cash flow statement related to business activities?

The cash flows used and created by each of the three main categories of business activities – operating, investing and financing – are listed in the statement of cash flows. This financial statement is intended to be a reconciliation of net income on an accrual basis to cash flows.

Net income is taken from the bottom of the income statement and the cash impact of balance sheet changes is identified to reconcile with actual cash inflows and outflows. Non-monetary items previously deducted or added to net income are added or deducted respectively 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, separated by specific types of activity.

What are the operating business activities?

Cash flow from operating business activities, usually the first section of the cash flow statement, includes many items from the income statement and the current part of the balance sheet. The cash flow statement adds some non-cash items such as depreciation and amortization. Then, changes in balance sheet items, such as accounts receivable and accounts payable, are either added or subtracted based on their prior impact on the bottom line. These items have an impact on the net income of the income statement but do not cause cash flow in or out of the company. Systematically negative operating cash flow is not common outside of nonprofit organizations.

What are investment business activities?

Investing activities are those that are capitalized over more than one year and usually appear in the second section of the cash flow statement. The purchase of long-lived assets is recorded as a use of cash in this section. Similarly, the sale of real estate is presented as a source of cash. The item “capital expenditures” is considered an investing activity and is found in this section of the statement of cash flows.

What is business finance?

The last section of the cash flow statement includes the financing of commercial activities. These include initial public offerings, secondary offerings and debt financing. The section also lists the amount of cash paid for dividends, share buybacks, and interest. All business activity related to fundraising and fundraising efforts is included in this section of the cash flow statement.