Business activity 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, operating activities tend to be considered the most important as they have the most direct impact on a company’s performance.
Understanding business activity models
All businesses ultimately fall into one or both of two categories. These are industry and commerce. Industry relates to the creation of goods and services. Commerce relates to the act of trading goods and services.
Industry is generally subdivided into primary, secondary and tertiary industries. Primary industries produce raw materials. Secondary industries use these raw materials to create products. Tertiary industries create services using the output from the secondary industries (and sometimes the primary industries).
Commerce is generally subdivided into trade and activities related to trade. Activities related to trade, essentially the act of buying or selling products or services, concern anything that helps to make that happen. For example, online sales platforms are an example of a service that helps people to buy and sell products.
All business activity models ultimately derive from these five core business types. They will typically be further subdivided into more specific industrial or commercial sectors. For example, both mining and farming are primary industries and hence follow the same core business model. There are, however, also clear differences between them.
However, there are 6 business activities undertaken by most companies regardless of sector. These are:
Operations and logistics
Sales and marketing
General administration (including human resources)
Budgeting and forecasting
Accounting and auditing
Four of these fall under the heading of operating activities.
Understanding operating activities
The terms “business activities” and “operating activities” are often used interchangeably. This is inaccurate but it does highlight just how much of business activity genuinely means operating activity.
This is because “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.
On an income statement, operating activities are found under the headings Cost of Goods Sold/Cost of Sales and Operating Expenses. Cost of Goods Sold/Cost of Sales reflects the direct cost of bringing goods/services to market. For example, this would include parts and the labour of employees directly involved in creating the goods/services.
Operating Expenses reflects the costs of promoting the goods/services and supporting the people who buy them. They are often called “Selling, General & Administrative Expenses”. As you might expect from the term, SG&A costs typically include sales and marketing, customer service and administration.
Understanding investing activities
Investing activities refers to activities that are (intended to be) capitalised 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 licence everything they need. This approach may, technically, work out more expensive over the long term, but minimises the need for substantial, ad hoc cash outlays. This helps to maximise smooth cash flow.
Understanding 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 and share issues.