Three Principal Types of Business Activity
Updated: Sep 5, 2019
What is a business activity? A business activity is any action undertaken by an individual or a company for the purpose of making a profit. There are three principal types of business activity: financing, investing and operating.
Financing activities are transactions with creditors or investors used to fund either business operations or expansions. The primary sources of funds for any business are personal savings, borrowing money (loans), or selling stocks in exchange for cash. For example, a man named Mark has dreamed of owning a vintage cafe for a long time. However, he doesn’t have the money to finance his dream business. What does he do? He has three choices. He can save up his personal funds in a savings account, take out a loan from his local bank, or sell any stocks he owns for cash. The famous saying “it takes money to make money” is completely true!
Once a business has gained the necessary cash through the financing activity of the business, that cash can be used for investing activities. Investing activities involve the purchase of the resources a business needs in order to operate. Continuing on Mark’s business journey, Mark has acquired the necessary funds for his business and he must now choose what to invest in. What can he purchase for his dream business? Any resources that are bought and owned are called assets. Mark purchased many necessary resources for his cafe business, such as a small building, furniture, equipment, produce, dishware, napkins, and decorations!
A business’s final principal activity is operating. Operating activities are the function of the business which provides goods or services creating revenue. Mark’s final step is choosing the best operation for his business. What does he do? Mark decides to hire employees, not just any employees, but his family members. This choice of operation brings a pleasant environment and a unique service to his customers. Mark's cafe becomes a huge hit in the community, which means many of Mark's long-term liabilities from the beginning of his business adventure are being paid off. Meanwhile, Mark gets to enjoy working and making a living in his dream cafe.
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