Business Activities: Definition and 3 Main Types

What Are Business Activities?

Business activities refer to all actions a business undertakes with the primary aim of generating profit. This general term encompasses all the economic activities carried out by a company in its daily operations.

A company's cash flow statements categorize these activities into three main types: operating, investing, and financing. Each type is crucial in a company's continuous efforts to create shareholder value.

Key Takeaways

Business activities are any events or actions a corporation takes to earn a profit.
Operating activities involve the core functions of the business, such as manufacturing, distributing, marketing, and selling goods. These activities generate the company's cash flow and significantly impact its profitability.
Investing activities relate to the long-term use of cash, including purchasing or selling property and equipment, and 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 through dividends, stock repurchases, and loan repayments, reflecting how the company finances its operations.

Understanding Business Activities

Business activities are categorized into three main types: operating, investing, and financing. These activities are detailed in the cash flow statement, which reconciles net income from an accrual basis to cash flow. The cash flow statement starts with net income from the income statement and adjusts for changes in the balance sheet to reflect actual cash inflows and outflows.

To determine cash flow, non-cash items previously deducted from net income are added back, while non-cash items that were added to net income are subtracted. The result is a report that gives the investor a summary of the company's business activities on a cash basis, segmented by type of activity.

Operating Business Activities

The first section of the cash flow statement is cash flow from operating activities. This section includes various items from both the income statement and the current portion of the balance sheet. The cash flow statement adjusts certain non-cash items such as depreciation and amortization. It also incorporates changes in balance sheet accounts like accounts receivable and accounts payable, adjusting for their previous impacts on net income.

These line items impact the net income on the income statement but don't result in a movement of cash in or out of the company. If a company shows negative cash flows from operating activities, it indicates that the company is financing its operations through either investing or financing activities. Consistently negative operating cash flow is rare outside of nonprofit organizations, which often maintain endowments that act as financial buffers to reduce the risk of revenue fluctuations.

Investing Business Activities

Investing activities are detailed in the second section of the statement of cash flows. These are business activities that have been capitalized for more than one year. The purchase of long-term assets, such as equipment or property with a useful life of more than one year, is recorded as a cash outflow in this section. Likewise, real estate sales are 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 final section of the cash flow statement covers financing activities or any business activity related to raising funds or managing financial obligations. This includes transactions where a company issues new shares to raise capital for various projects, secondary offerings, and debt financing. It also details cash outflows for dividends, share repurchases, and interest payments.

How Is the Cash Flow Statement Linked to Business Activities?

The cash flow statement is linked to all three business activities: Operating, investing, and financing. To comply with generally accepted accounting principles (GAAP), financial statements must include a statement of cash flows. It provides a detailed reconciliation of net income on an accrual basis to actual cash flow. The process begins by taking net income from the bottom of the income statement. Adjustments are then made to account for the cash impact of changes in balance sheet items, converting accrual-based net income to cash-based figures. Non-cash items previously deducted from or added to net income are reversed to reflect true cash flow. 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.

What Are Operating Business Activities?

Cash flow from operating business activities, usually the first section of the cash flow statement, includes items from both the income statement and the current portion of the balance sheet. The cash flow statement adjusts net income by adding back non-cash items like depreciation and amortization. It then accounts for changes in balance sheet items, such as accounts receivable and accounts payable, by adding or subtracting their impact on net income. These line items impact the net income on the income statement but don't result in a movement of cash in or out of the company. It's uncommon for organizations, except nonprofits, to have routinely negative operating cash flow.

What Are Investing Business Activities?

Investing business activities are capitalized over more than one year and usually appear as the second section of the cash flow statement. In this section, the purchase of long-term assets is recorded as a use of cash. Likewise, real estate sales are 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.

What Are Financing Business Activities?

The cash flow statement’s final section includes financing business activities. These include initial public offerings (IPOs), 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.

The Bottom Line

Business activities are all actions a corporation undertakes to generate a profit. It's a general term that comprises all economic activities a company carries out during business. Business activities are divided into three main types—operating, investing, and financing— and each type plays a crucial role in the company's efforts to create shareholder value. Understanding these activities provides insight into how a company operates and manages its financial resources.