Business Activities Meaning
Business activities refer to the activities performed by businesses to make a profit and ensure business continuity. Examples include production, sales, purchase of property, plant, and equipment, acquisition of other companies, purchasing marketable securities, and obtaining loans from financial institutions.
Proper conduct and management of business undertakings play an important role in generating adequate cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. and stakeholderStakeholderA stakeholder in business refers to anyone, including a person, group, organization, government, or any other entity with a direct or indirect interest in its operations, actions, and outcomes. satisfaction. It, in turn, helps businesses to sustain its life and grow. Hence, activities efficiency indicates an entity’s conformity with the going concern conceptGoing Concern ConceptGoing Concern concept is an accounting principle which states that the accounting statements are formulated with a belief that the business will not be bankrupt or liquidated for the foreseeable future, which generally is for a period of 12 months..
Table of contents
- Business activities refer to all kinds of activities firms conduct to achieve their purpose. It generates revenue and ensures business continuity.
- Examples include production, marketing, and sales.
- The three types of activities are operating, investing, and financing activities.
- Operating activities are the core activities performed by an entity daily, supporting the entity’s primary purpose. Financing activities are associated with collecting funds for financial strength and business growth. Finally, investing activities occur when the entity invests in long-term assets.
Business Activities Explained
Business activities are the core of every organization. After incorporation of the firm or starting a business and being idle will not create revenue.Revenue.Revenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. It will remain as a cost-incurring node. It’s the function of input and activities that generates revenue. Hence the collection of day-to-day operations, financing, and investing activities powers the entity to run efficiently and generate revenue.
The activities performed by entities vary based on factors like industry and size of the entity, and type of entity structure followed. For example, a service company will not have manufacturing activities. Also, comparing e-business and traditional brick and mortarBrick And MortarBrick and Mortar is a kind of business that offers goods and services to its customers face-to-face through a physical outlet. It represents a physical presence of a business. business models draws attention to the difference in their logistics functions.
The nature and complexity of activities vary between small and large entities. Small businesses can do more with fewer resources. For example, small entities can survive without events like human resource activities and technology utilization, unlike large organizations that spend heavily on human resource management and technologies. Nowadays, large organizations may use business activity monitoring software’s to collect information about various operations and processes of the entity to make better business decisions.
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Types of Business Activities
Different activities in an entity are segregated into different types primarily based on their nature. The three main types of business activities are operating, financing, and investing activities. The prime purpose of these classifications comes into highlight while preparing the cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. of a business. It helps to identify which activities are causing more cash outflows or inflows.
#1 – Operating
Operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production. refer to the core activities performed by an entity daily like production, sales, and marketing. Operating activities are inherent to every entity. It helps produce goods and services to the target marketTarget MarketA target market consists of different groups of individuals, households, and organizations towards which a company aims to offer its products and services. to achieve the desired result. These activities cause cash outflows, and its successful conduct contributes significantly to the cash inflows.
One of the main sources of operating activities is administrative units like accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements. and human resources. Similarly, other departments like manufacturing, marketing, and sales department entail various operating activities. Examples of the operating activities section of a cash flow statement generally include cash flows associated with accounts receivablesAccounts ReceivablesAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. , accounts payablesAccounts PayablesAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period., interest payment, taxes, cash from customers, cash paid to suppliers, etc.
#2 – Investing
Investing activities originate when an entity engages in tasks like purchasing and selling property, plant, and equipment. The investment activities section in the cash flow statement portrays the cash inflow and outflow during a specific period when the company engages in investments.
Cash outflow commonly occurs due to investing in fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples., and inflows are obtained from the sale of fixed assets. For example, the investing section of the cash flow statement contains cash flows associated with proceeds from the sale of PPE (property, plant, and equipmentProperty, Plant, And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. ) and purchase of property plant and equipment.
#3 – Financing
Financing activitiesFinancing ActivitiesThe various transactions that involve the movement of funds between the company and its investors, owners, or creditors in order to achieve long-term growth are referred to as financing activities. Such activities can be analyzed in the financial section of the company's cash flow statement. are associated with collecting funds for a firm’s growth and attaining financial strength. They may use the fund for investing in long-term projects and support daily operations. It portrays cash flow between the business, its investors, and creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. . As a result, an entity’s financing activities throw light into its capital structureCapital StructureCapital Structure is the composition of company’s sources of funds, which is a mix of owner’s capital (equity) and loan (debt) from outsiders and is used to finance its overall operations and investment activities.: the proportion of equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. and debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state. used.
The activities include collecting long-term funds and settling the long-term liabilities Liabilities Liability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.or other obligations. The financing activities section of the cash flow statement comprises dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. payment, proceeds from stock and debt issuance, repayment of long-term loans and purchase of treasury stocksTreasury StocksTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. , etc.
Frequently Asked Questions (FAQs)
It refers to the activities performed by a business entity to maintain the active state and generate profit. It is through these activities an entity collects or utilizes its resources. For example, manufacturing activities convert the input to output products, sales produce revenue, logistics deals with warehousing, and transportation of products.
They are classified into operating, financing, and investing activities. Operating activities are the core activities performed by an entity daily supporting the entity’s primary purpose like production, sales, and marketing. Financing activities are associated with collecting funds for business growth, for example, issuing bonds or debentures. Finally, investing activities occur when the entity invests in long-term assets like purchasing PPE (property, plant, and equipment).
Examples include manufacturing, warehousing, accounting, sales, mergers and acquisitions, issuance of securities, etc. Prompt delivery of these activities enables the entities to compete and thrive in the market.
This has been a guide to Business Activities and its meaning. Here we explain the types of business activities, along with their detailed explanations, and examples. You may also learn more about financing from the following articles –
- Business Ecosystem
- Business CycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.
- Business Continuity PlanningBusiness Continuity PlanningBusiness continuity planning (BCP) is a set of procedures and instructions to restore critical business processes in the event of disasters. It is a document, which contains information about managing business assets, such as human resources and supplies and equipment, data backups, business partners, key personnel, etc.