Cash flow from investing and financing activities: what goes in each, with a worked example

Short answer: a statement of cash flows splits the change in your bank balance into three parts. Operating activities is the cash from day-to-day trading. Investing activities is cash spent on, or received from selling, long-term assets: vehicles, machinery, computers, a fit-out, property, another business or a long-term investment. Financing activities is cash that comes from, or goes back to, the people who fund the business: loans received and the capital part of loan repayments, money the owners put in, drawings and dividends. Investing is usually negative, because a working business keeps buying equipment. Financing is positive in a year you borrow or the owners put money in, and negative in a year you repay loans or pay the owners. The useful question is whether operating cash paid for the investing and the payments to owners and lenders, or whether a loan or the bank balance did.

What goes in each section

Section	Cash in (inflows)	Cash out (outflows)
Investing activities	Selling a vehicle, machine, equipment or property; selling shares in another business; a loan you made to someone else being repaid; interest and dividends received (under IAS 7 these can also sit in operating)	Buying vehicles, machinery, tools, computers, a fit-out or property; buying another business or shares in one; lending money to another business
Financing activities	A bank or equipment loan received; drawing on an overdraft facility treated as borrowing; money the owners put in (capital introduced, new shares, a director lending to the company)	Capital repayments on loans and hire purchase; the capital part of lease payments in IFRS 16 / AASB 16 accounts; drawings; dividends; repaying a director’s loan
Not in either	Interest paid (operating in most small business statements); the interest part of a loan repayment; depreciation (no cash moves); transfers between your own accounts

Two lines that often land in the wrong place:

• Loan repayments. Only the capital part is financing. The interest part is a cost on the Profit and Loss, and its cash usually sits in operating. A $1,250 monthly repayment made of $1,000 capital and $250 interest is $1,000 of financing and $250 of operating.
• Equipment on hire purchase or finance. If the lender pays the supplier directly, no cash passed through your bank for the purchase, so the asset is a non-cash investing and financing activity: it is left out of both sections and described in a note. Only the deposit (investing) and each capital repayment (financing) appear.

Interest paid and dividends paid can sit in operating or financing under IAS 7 today. From annual periods beginning on or after 1 January 2027, IFRS 18 moves interest paid and dividends paid to financing, and interest and dividends received to investing, for most businesses that report under full IFRS. The IAS 7 statement of cash flows guide shows one company’s figures both ways. In Xero, and in most small business accounts, interest paid stays in operating.

A worked example: a landscaping company buys a truck

Made-up figures for a landscaping company in Hobart, a Pty Ltd with two directors, for the year to 30 June 2026. Every figure excludes GST.

	$
Net cash from operating activities	58,000
Investing activities
Purchase of a tipper truck	(72,000)
Purchase of a mower and tools	(9,000)
Sale of the old ute	14,000
Net cash from investing activities	(67,000)
Financing activities
Equipment loan received	50,000
Loan repayments (capital part)	(13,000)
Dividends paid to the directors	(30,000)
Net cash from financing activities	7,000
Net decrease in cash	(2,000)
Cash at 1 July 2025	46,000
Cash at 30 June 2026	44,000

Brackets are minus figures. Operating activities is worked out as in cash flow from operations; it already includes $3,000 of interest paid.

The bank balance fell by only $2,000 in a year when the company spent $81,000 on equipment, which looks reassuring. Reading the three sections together tells a different story:

1. Trading paid for less than the equipment. Operating cash of $58,000 less the $81,000 of equipment is free cash flow of minus $23,000, or minus $9,000 after the $14,000 from selling the old ute. The free cash flow calculator does this on your own figures.
2. The loan paid for the dividends. The directors took $30,000 and the company repaid $13,000 of loans, $43,000 in all, in a year when trading did not cover the equipment. Without the $50,000 equipment loan the company would have ended the year $6,000 overdrawn (44,000 − 50,000).
3. Next year’s financing is already bigger. The new loan adds about $10,000 a year of capital repayments, so repayments rise to $23,000. If operating cash stays at $58,000 and only $8,000 goes on tools, a second $30,000 of dividends leaves the year $3,000 short: 58,000 − 8,000 − 23,000 − 30,000. The most the company can pay its directors without the bank balance falling is about $27,000. How much can I pay myself? works out a figure like this from your own Xero numbers.

None of this is visible on the Profit and Loss, which shows only the depreciation on the truck and the interest on the loan.

Positive or negative: what each pattern usually means

Operating	Investing	Financing	What it usually means
Positive	Negative	Negative	Trading pays for the equipment and for what goes to lenders and owners. The healthy, settled pattern
Positive	Negative	Positive	Growing or replacing equipment with help from a lender or the owners. Fine if operating cash will cover the repayments that follow
Negative	Negative	Positive	Lenders or owners are paying for both the trading and the equipment. Fine for a start-up with a plan; a warning sign in an established business
Positive	Positive	Negative	Selling assets and using the money to repay debt or pay the owners. Normal when winding something down; a concern if it funds regular dividends
Negative	Positive	Negative or zero	Selling assets to keep going. Look at operating cash first

One year’s pattern is not a verdict: a business that buys a building every ten years will have one very negative investing year. Look at three years together, and at operating cash against investing plus financing outflows.

Sole traders and partnerships

A sole trader has no dividends, but the same logic applies. Drawings are financing outflows, and so is personal income tax paid from the business account when it is coded to drawings. Capital introduced (money you put in from your own account) is a financing inflow. A sole trader whose drawings are bigger than operating cash less equipment, year after year, is running the bank balance down, however good the profit looks. The net cash flow calculator splits a period into the three sections and says which one moved the bank, and cash inflow and outflow examples lists where each everyday payment belongs.

How to see investing and financing activities in Xero

1. Go to Accounting › Reports and open the Statement of Cash Flows. Choose the period, ideally a full financial year, and compare it with the year before.
2. Read the Investing Activities and Financing Activities sections. Xero puts each movement in a section according to the account type of the account it is coded to: fixed asset accounts go to investing, and loan and equity accounts (including drawings, dividends and capital introduced) go to financing.
3. Check the lines that look wrong. A vehicle coded to an expense account lands in operating and makes trading look worse. A loan set up with the wrong account type may not show under financing at all. A whole loan repayment coded to one account hides the interest. Fix the coding (or ask your bookkeeper to) before relying on the report.
4. Check the GST. In Australia and New Zealand the GST you claim back on a large asset usually comes back through your BAS or GST return, which sits in operating. The $7,200 of GST on the landscaper’s $72,000 truck would make one quarter’s operating cash look $7,200 better than its trading was.

Menu names and labels move between Xero releases and regions; if something does not match your screen, search Xero Central for the report name. Xero Statement of Cash Flows: how to run and read it covers the report line by line, and the cash flow statement example works a full year by both the direct and the indirect method.

Common mistakes

• Reading the bank balance alone. The landscaper’s cash barely moved, but only because of a $50,000 loan that now has to be repaid.
• Treating a negative investing figure as bad. Buying equipment is normal. The question is what paid for it.
• Counting the whole loan repayment as financing. The interest is a cost on the Profit and Loss and sits in operating; only the capital part is financing.
• Expecting hire purchase to show as a purchase. If the finance company paid the supplier, neither the asset nor the loan appears as cash; only the deposit and the repayments do.
• Comparing a sole trader with a company. A sole trader’s income tax usually goes through drawings (financing), while a company’s tax is in operating.
• Judging from one year. Investing is lumpy. Look at three years, and at operating cash against equipment, repayments and owner payments added together.

If a loan is part of the picture, cash flow loans explains how lenders size one from your trading cash, and cash flow cover is the ratio they use to check the repayments are affordable.

Common questions

What are investing activities in a cash flow statement? Investing activities are cash paid for, or received from selling, long-term assets: vehicles, machinery, equipment, computers, fit-outs, property, other businesses and long-term investments. Money lent to another business, and its repayment, also goes here.

What are financing activities in a cash flow statement? Financing activities are cash flows between the business and the people who fund it: loans received and the capital part of loan repayments, money the owners put in, new shares, drawings and dividends.

What are examples of cash flow from financing activities? Taking out a bank or equipment loan, repaying the capital on a loan or hire purchase agreement, a director lending money to the company or being repaid, an owner putting money in, drawings, and dividends paid to shareholders.

Is a negative cash flow from investing activities bad? Not usually. It means the business spent more on long-term assets than it received from selling them, which is normal for a business that is replacing or adding equipment. What matters is whether trading cash, a loan or the bank balance paid for it.

Are loan repayments operating or financing activities? The capital part of a loan repayment is a financing activity. The interest part is a cost on the Profit and Loss, and in most small business statements, including Xero’s, the interest paid is shown in operating activities.

What are non-cash investing and financing activities? Transactions that create an asset and a debt without cash passing through your bank, such as equipment bought on hire purchase where the lender pays the supplier, or a loan converted into shares. They are left out of the statement of cash flows and described in a note.

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