Business Activities: Operating, investing and financing activities.

Introduction

Normally businesses are aimed at producing goods and services that produce a flow of income in and out of the company. This inflow and outflow of money in any business entity is known as cash flow. A Cash flow of any business is concerned with 3 types of business activities. Businesses focus on the income generated from sold goods and services. This is the operating cycle of a company. However, to make the operating cycle successful, they also focus on the other two cycles: investment cycle and the financing cycle. Each cycle contains its cash flow. To understand cash flow from a business perspective, it is important to understand the activities of a company.

Business Activities:

Businesses engage in activities to generate profit. These activities are also known as cycles in business because they occur again and again within a company. There are three types of business activities: Operating cycle, Investment cycle, and Financing cycle (Equity and Debit Financing).

Operating cycle and Cashflow

This is the most important cycle of any business. Investors focus on planning made for the operating cycle. This cycle of a company generates profit and losses from the investments made by investors. Any start-up or company focuses on the operating cycle and present worthiness of the operating cycle i.e. how the project will generate profit. In technical terms, this cycle converts its resources into cash by focusing on the core business of a company.

Initial investments are collected to finance the purchase of raw materials and convert it into goods. Sometimes, investments are made to purchase the skills of people to provide services to the public. So, it involves the whole process of purchasing raw materials and skills of individuals to the sales of goods and services. A point of concern here is the difference in time between the purchase of raw material, then its production of goods, and then selling of goods and services. This is known as time lag and often occurs with a supplier’s credit and a customer’s credit. So, this whole process made a difference in operating outflows and operating inflows. Operating inflows and outflows, and a balance of these flows is known as Operating cash flow.

Every company and business has its operating cycle. From a cash flow perspective, it generates positive or negative cash flow at different times. Operating cash flow (Operating inflow and outflow) is analyzed by periods (monthly, quarterly, or yearly). Cash flow from each period is generated by the company’s operation. This cash flow is the operating cash flow of the company.

Investment cycle and operating outflow

The investment cycle within a company is considered as the most important one and the major factor in the success of the operating cycle. The general purpose of investment is to grow capital. Similarly, from a cash flow standpoint, Investments are made to increase the operating cash flow of the operating cycle. Investments have a longer life than the operating cycle.

Investment outflow is different from normal outflow. Investment outflow serves a specific purpose. Investment outflow is required to start a project within a company. This can include expenditure on equipment, land, raw materials related to products and services, and other necessary equipment. Normal outflow affords enjoyment while investment represents abstinence. Investments serve the purpose of boosting the cash flow of the operating cycle.

Most of the time capital generated from operating cash inflow is reinvested in the company. This is worthwhile for a business and helps boost future operating inflow. Companies also look for the time difference that comes with buying raw materials and selling the end product. At the same time, the company looks for the expenditures and other costs. For this purpose, companies consider financing activities to pay the suppliers and employees.

Financing cycle and Cashflow

The financing cycle contains financing activities that help businesses support their day-to-day operations, investments, and capital structure. The operating and investment cycle of a company gives rise to a time difference in cash flow. Transformation of raw material into end production takes time and effort by laborers. There are other supervising staff and resources that are used to establish the end product. Employees and suppliers must be paid before customers settle up. Just like investments are filled before generating any profit, similarly this needs to be filled with the help of financial resources.

These financial resources are used to fill the shortfalls resulting from the time differences. Most of the time companies form two types of financial instruments to finance their business. There are:

• Debit securities
• Equity Securities

These financial resources are provided by investors who can be shareholders, debtholders, or lenders. It depends upon the types of securities the investors choose for them. Investors can’t provide financial resources with “no strings attached”.

Shareholders are equity security holders with in a company, their capital is tied to the risk of business. However, they are granted with decision-making powers and control over the business in various other ways. As far as cash flow is concerned, the equity cycle involves inflow when capital increases and outflow in the form of dividend payments.

Debtholders have nothing to do with the business risk. The company is bound to pay the periodic interest payment and capital repayment on time. The financing cycle covers the shortfalls if the free cash flow is zero.

Conclusion

In conclusion, the three main types of business activities—operating, investing, and financing—are integral to the success and sustainability of any business. Operating activities encompass day-to-day business operations, including sales, production, and distribution, which generate revenue and drive profitability. Investing activities involve the acquisition and disposal of assets, such as investments in equipment, real estate, or other businesses, aimed at enhancing long-term growth and value creation. Financing activities, on the other hand, focus on securing and managing capital, including raising funds through debt or equity, and managing cash flows to support business operations and growth initiatives.

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