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Home / Finance / Understanding operating, financing and investing activities of the company

Understanding operating, financing and investing activities of the company

Last updated on December 21, 2023 by CA Bigyan Kumar Mishra

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All listed companies are bound to report their cash flow statement while announcing their annual financial results.

Cash flow statement is part of the financial statements that the company publishes every year.

For financial reporting purposes, business activities are classified into three groups: operating, investing and financing activities in the cash flow statement.

A cash flow statement shows the net cash flow from:

  • Normal operations or Operating activities;
  • Investing activities;
  • Financial activities.

Let us understand these business activities in detail. It will help you to understand the company’s cash flow statement which is presented under operating, investing and financing activities.

Operating activities of a business

Operating activities means the day-to-day business activities of the company that create revenues by selling products and/or providing services.

To generate revenue, companies undertake activities such as manufacturing products, purchasing inventory from suppliers, paying salaries and wages and other operating activities.

Following table shows how an operating activity is defined based on the business activities of a company.

Type of industryOperating activities
RestaurantsSale of meals, food and beverages
Consulting firmsSale of services
BankTaking deposits and making loans

Cash flow from operations shows how much cash came into the company and how much went out during the normal course of business.

A negative cash flow from operation means that the company failed to meet its cash needs. In such cases, the company must lower its expenses or raise cash.

Investing activities

Every business will have its own investment. 

Under investing activities the company discloses activities related to acquisition and disposal of long term assets, purchase and sale of investments.

Investment includes property, plant and machinery, other long term assets, intangible assets and investments in the equity and debt issued by other companies.

Here are two key examples of investing activities;

  • Purchase of equipment or sale of surplus equipment.
  • Purchase or sale of other entities’ equity and debt securities
  • Sole obsolete or unneeded equipment

For example, purchase or sale of an office building, plant and machinery used in a restaurant business is considered as investing activities.

Cash flow from investing activities shows cash that comes in and goes out because of various investing activities that are not connected to business as usual.

Financing activities

Financing activities related to those activities which relate to obtaining and repaying capital. 

The two primary sources of capital are shareholders and creditors. Therefore financing activities include obtaining or repaying capital, such as equity and long term debt.

Example of financing activities includes followings;

  • Issuance or repurchase of the company’s own preferred or common stock. 
  • Issuance or repayment of debt
  • Payment of distributions (i.e., dividends to preferred or common stockholders)

In general, most of the company’s profit will come from operating activities. Line items in the income statement of a company will tell you what operating activities the company carried out throughout the period to generate money.

For example, sales of goods and services to customers which impacts revenue of the company will tell you the kind of product the company is selling or services its rendering to generate income. Against the revenue, the company must have listed costs of providing the goods and services to find out net income or profit.

Classification of operating, financing and investing activities depends on the type of business the company does. For example interest received by a bank is an operating activity as the bank is into lending money business. However, if a software company has received interest on a bond investment, then it will be shown as investing activity as the software company is not into the business of lending money.

All these business activities are grouped in financial statements under the group of assets, liabilities, owners’ equity, revenue, and expenses.

Direct and indirect cash flow formats for reporting operating cash flows

Operating cash flows are reported in two acceptable formats: the direct and the indirect methods.

Under both methods operating cash flow is identical, only the presentation format differs.

Remember, the presentation format of cash flows under investing and financing activities are the same irrespective of the method you use for reporting operating cash flows.

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Categories: Finance

About the Author

CA Bigyan Kumar Mishra is a fellow member of the Institute of Chartered Accountants of India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.

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