Cash Flow From Investing Activities
We all know that cash flow is the lifeblood of any successful business.
Well, except for early-stage pre-revenue companies, but that’s a story for another day.
Cash flowing in and out of the coffers tells the story of the company’s financial health, capabilities, and future direction, all spelled out in a helpful little report we call the cash flow statement.
But if you’ve ever given more than a second glance to your trusty cash flow statement, you’ll have noticed that it’s broken down into three sections:
- Cash flow from operating activities
- Cash flow from financing activities
- Cash flow from investing activities
Wait, investing activities?
But we’re a small business, not a hedge fund! What investing activities could we possibly be engaging in?
That’s the topic of today’s lesson.
We’ll dive deep into the cash flow from investing activities section of the cash flow statement, explaining what it is, what it includes, and how to use the resulting figures to analyze your cash flow.
Note: If you’re new to cash flow statements, start here: How to Read a Cash Flow Statement
What Is Cash Flow From Investing Activities?
Cash flow from investing activities reports the amount of cash that has been generated or spent on various investment-related business activities.
This might include the purchase or sale of securities like stocks and bonds, though it’s more typically related to the sale or purchase of capital equipment.
For instance, if you decide to launch an outside sales program and buy a fleet of new vehicles, the purchase of those vehicles will show up in the cash flow from investing activities section.
Cash flow from investing activities is the third section of the cash flow statement.
Here’s what it looks like in Finmark from BILL.
What Cash Flow From Investing Activities Tells You About Financial Health
Separating cash flow from investing activities from other business activities (such as normal operating activities) helps us perform a more accurate and contextual cash flow analysis.
Let me explain.
Imagine that for the last three months, overall cash flow has been negative.
Generally speaking, we want cash flow to be positive, and negative cash flow is typically an indication of poor performance.
But by separating the different cash-related activities in the cash flow statement, the true story emerges.
For example, you can be cash flow positive from operating activities (which means you’re making money from the main thing your business does), but cash flow from investing activities could be dragging the total cash flow into the red.
By diving into this section of the cash flow statement, you see that ongoing investment in new company vehicles is the culprit. So, while cash flow is negative, your company is actively investing in growth, which is hardly a bad thing.
So, potential investors or business partners look to cash flow from investing activities to understand the true activities a company is partaking in, and to more accurately and contextually interpret its cash flow statement.
P.S. Want to learn more about cash flow from operating activities? Check out our guide: Cash Flow From Operating Activities
What Is Included In The Cash Flow From Investing Activities Section?
To really get a handle on how to use the cash flow from investing activities section of the cash flow statement, you’ll want to know exactly what goes into it (and what doesn’t).
This section includes the purchase and sale of non-current assets that are expected to deliver value in the future.
So, if you buy some kind of equipment that you expect to use to help grow the business (factory machinery, for instance), that’s a non-current asset.
Similarly, if you decide to invest part of your war chest in the market with a selection of stocks, this would be included in the cash flow from investing activities section.
Here’s a quick list of what you’ll see in this part of the cash flow statement:
- Purchase and sale of PPE (property, plant, and equipment), sometimes called fixed assets
- Capital expenditures (how your company is investing in future operations)
- Purchase and sale of market securities (such as stocks and bonds)
- Lending cash to other organizations
- Collection of loans or insurance proceeds
And, just so you’re super clear on what to include in this part of the cash flow statement, here are some line items that aren’t included (but are often mistaken for investing activities):
- Debt or equity financing
- Interest payments
All of these go in the cash flow from financing activities section, by the way. Learn more about that here: Cash Flow From Financing Activities
How To Calculate Cash Flow From Investing Activities
Calculating cash flow from investing activities is incredibly straightforward.
You’re simply going to add up all of the investing activities that were cash flow positive and separately calculate those that were cash flow negative.
Then, you’ll subtract the negative from the positive to get your net cash flow from investing activities.
Let’s look at an example:
Imagine that last month we engaged in the following investment-related activities:
- Purchase of marketable securities: $5,000
- Sale of marketable securities: $23,000
- Purchase of capital equipment: $20,000
- Sale of capital equipment: $34,000
First, we add up the cash inflows ($23,000 + $43,000 = $65,000). Then, the cash outflows ($5,000 + $20,000 = $25,000).
Finally, subtracting the outflows from the inflows, we get our net cash flow from investing activities ($65,000 – $25,000 = $40,000).
Keep On Top Of Cash Flow From Investing Activities
Understanding what makes up the cash flow from investing activities is an important step on the way to performing more accurate, contextual, and valuable cash flow analyses.
And that’s exactly the point. Your time should be dedicated to the analysis of important financial reports like the cash flow statement, not the actual creation of those documents.
So, why not check out Finmark, the financial planning and modeling platform for ambitious finance professionals who want to get more out of their data?
Connect your finance and accounting tools with Finmark, build cash flow statements with ease, then put your analysis skills to work.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.