Business Activities is any activity related to the purpose of making a profit. It is often divided into operating activities, investing activities and financing activities. Of these! The operating activities tend to be considered the most important as they have the most direct impact on a company’s performance.
Operating Activities
Operating activities refers to all business activities that directly or indirectly relate to the provision of goods and/or services. As such, they have a direct impact on cash flows and hence, ultimately, on income.
Operating 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.
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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 Activities
Investing activities refers to activities that are (intended to be) capitalized over more than a year. This typically includes capital expenditures such as the purchase of long-term assets and/or real estate.
Modern businesses vary in their use of investing activities. Some businesses still obtain value from investing in assets. These are generally established businesses and/or businesses with more traditional business models. These days, however, it’s not unusual for businesses to rent/lease and/or license everything they need. This approach may, technically, work out more expensive over the long term, but minimizes the need for substantial, ad hoc cash outlays. This helps to maximize smooth cash flow.
Financing Activities
Financing activities refers to activities that fund the business, but aren’t directly linked to revenues from goods or services. Common examples of funding activities are loans, bonds, share issues, initial public offerings, secondary offerings, and debt financing. The financing activities 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 financing activity.
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Summary of Business Activities
- Business activities are any events that are undertaken by a business 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.
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