What are the commercial activities?
Commercial activities include any activity in which a business engages for the primary purpose of making a profit. It is a general term which includes all the economic activities carried out by a company in the course of its activities. Commercial activities, including operating, investing and financing activities, are ongoing and aim to create value for shareholders.
Key points to remember
- Commercial activities are any event undertaken by a company for the purpose of making a profit.
- The operating activities relate directly to the company which supplies its products on the market, in particular manufacturing, distribution, marketing and sales; they provide the bulk of the company’s cash flow and greatly influence its profitability.
- Investing activities relate to the long-term use of cash, such as the purchase or sale of a property or piece of equipment, or the gains and losses on investments in the financial markets and operating subsidiaries.
- Financing activities include sources of liquidity from investors or banks and uses of cash paid to shareholders, such as the payment of dividends or share buybacks and the repayment of loans.
Understanding business activities
There are three main types of business: operations, investment and finance. The cash flows used and created by each of these activities are listed in the cash flow table. The statement of cash flows is intended to be a reconciliation of net earnings on an accrual basis to cash flows. Net income comes from the bottom of the income statement and the impact on cash flow of changes to the balance sheet is identified to approximate actual cash inflows and outflows.
Non-monetary items previously deducted from net income are added to determine cash flows; non-cash items previously added to net income are deducted to determine cash flows. The result is a report which gives the investor a summary of the business activities within the company on a cash basis, separated by specific types of activities.
The first section of the cash flow table is the cash flow from operating activities. These activities include many elements of the income statement and the current part of the balance sheet. The cash flow table adds certain non-monetary items such as depreciation and amortization. Then, changes in balance sheet items, such as accounts receivable and accounts payable, are either added or subtracted based on their prior impact on the bottom line.
These items have an impact on the net result of the income statement but do not cause cash flows inside or outside the company. If the cash flows from operating activities are negative, this means that the company must finance its operating activities either through investment activities or through financing activities. Systematically negative operating cash flows are not common outside of not-for-profit organizations.
Investing in commercial activities
Investing activities are included in the second section of the statement of cash flows. These are commercial activities capitalized over more than a year. The purchase of long-lived assets is accounted for as a use of cash in this section. Similarly, the sale of real estate is presented as a source of liquidity. The “capital expenditure” item is considered an investment activity and is found in this section of the statement of cash flows.
Financing of commercial activities
The last section of the cash flow table includes financing activities. These include initial public offers, secondary offers and debt financing. The section also lists the cash amount paid for dividends, share repurchases and interest. Any commercial activity related to fundraising and fundraising efforts is included in this section of the cash flow table.