Business activities refer to activity a business engages in for the primary purpose of earning a profit through customer satisfaction. All the business activities depend on each other to ensure constant process and cannot serve the purpose of customer satisfaction solely.
There are three main types of business activities: operating, investing, and financing. It involves multitude of exercises and theses activities, are ongoing and focused on creating value to its consumers.
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.
Types of Business Activities
There are mainly three types of business activities
1) Operating Activities:
Operating activities refers to activities that a business engage in on a daily basis to increase the value of the company and earn a profit. The activities are directly related to providing its goods and services to its consumers.
The main fundamental operating activities for a business includes sales, customer service, administration and marketing. These activities are part of the day-to-day functioning of a business which take effect in company’s monthly, quarterly and annual income and profits. This Operating activities provide the majority of the cash flow in a business and hence determine the profitability.
2) Investing Activities:
Investing activities follow the daily operation of a business activities. It consists of buying and selling of long term assets and other investments.
Investing activities are recorded on the receipts side in cash flow statement. In other words, it is the net amount of cash collected and paid during a financial period for long-term support and investments.
Investing activities are necessary for supporting growth of a business in future. By investing in long term assets, companies expect to get more revenue and make higher profits. The prospect of higher profits is positive point to stock investors, which will see a rise in stock prices. For creditors and investment banks, more profit means more cash inflow, means the company has a higher probability to repay debts.
3) Financing Activities:
Financing activities refer to the flow of cash between a business and its owners and creditors.
It is the net amount of funding a company generates in a given time period. It focuses on how a business raises certain amount of cash to pays back to its investors. The activities include IPO, secondary offering, issuing and repayment of equity, payment of dividends, and repayment of any debt taken by a company, and capital lease obligations.
For example, purchasing and selling of products or assets, organizing and maintaining accounts, arranging loans, selling stocks or bonds, etc are recorded as financial activities. Both cash inflows and outflows from creditors and investors are considered in financing activities.