Small business owner checking her investing activities to create a cash flow sheet
Cash flow

What is Cash Flow From Investing Activities?

The cash flow statement is an integral part of the three financial statements. Within this important statement, the ‘Cash Flow from Investing Activities’ section gives investors valuable insights into a company's performance. 

In this article, we will discuss investing cash flow, investing activities examples, how to calculate cash flow from investing, and why cash flow from investing activities is important for assessing a company’s growth. 

What is Investing Cash Flow? 

Cash flow, in general, is the inflow and outflow of cash that a business experiences. Investing cash flow relates to all the money generated or spent through the business’ investment-related activities. Cash flow from investing activities can be found on the cash flow statement. 

Investing activities examples 

Activities related to investing play an integral part in the growth and capital of a business. So what is considered to be investing activities? 

In short, investing activities can include any long-term, non-current, and fixed assets related to the business. Let’s look at the various types of investing activities:

  • Property, Plant, and Equipment (PPE): PPE is a large line item in the balance sheet, which makes it an important item on the statement. It is also considered an investing activity since these assets fall under  long-term fixed assets. When investors and stakeholders are required to investigate how much a company spends on PPE, they can  look for sources and uses of PPE-related funds in the investing section of the cash flow statement. 
  • Purchase of various fixed assets: Other than PPE, there are many other fixed assets that a company can invest in. Such purchases can be categorized as capital expenditures, which is considered a popular measure of capital investment. An increase in purchases of fixed assets (capital expenditure) could signify that the company is in a state of growth. 
  • Purchase of stocks and securities: Every company has the right to own stocks, bonds, and mutual funds. These investments fit in the category of stocks and securities and are considered investing activities in the cash flow statement. 

Investing activities’ cash flow can be either positive or negative. Cash spent (cash outflow) means that the investing activity cash flow was negative. However, the sale of investments (cash inflow) means that the investing activity cash flow was positive. 

What do investing activities not include? 

There are specific items that are not included under investing activities. These items not included under this investing category of the cash flow statement include: 

  • Interest payments and dividends
  • Forms of financing, i.e. debt and equity
  • All income and expenses generated from the everyday business operations
  • Depreciation of capital assets 

Cash Flow Statement Investing Activities

The cash flow statement is the record of all the cash coming in (cash Inflows) and going out (Cash Outflows) of a company. The cash flow statement records all the cash the company makes and spends in three main ways- 

  1. Cash Flows from Operations
  2. Cash Flows from Investing 
  3. Cash Flows from Financing

These three sections play a significant role in the evaluation of the company. Stakeholders and investors use these sections in the cash flow statement to evaluate the valuation of a company’s stock and the overall health of the business. 

Cash flow statement investing activities is the second section of the statement, and it’s an integral part. . Here’s why; investors usually go to this section to track changes in the Capital Expenditures. 

The capital expenditures give very useful insights into the performance of the company. Moreover, since the cash flow statement follows cash accounting instead of accrual accounting, the capital expenditure portrays a  realistic picture of the company’s financial position. 

When capital expenditure increases, it generally causes a reduction in cash flow. However, such scenarios aren’t necessarily  bad for the company’s health. Capital expenditure, as mentioned, is the purchases of assets by the company. Therefore, an increase in capital expenditure could mean that the company is investing more towards their growth and future. Typically, companies that show a high capital expenditure in their statements also happen to be companies that are in their growth phase. 

How to Calculate Cash Flow From Investing

For the calculation of cash flow from investing, let’s consider a hypothetical situation:

In this hypothetical situation, we will look at the investing activities of Company X. 

  1. Company X is a start-up, that spent $30,000  during its third year in business on Capital expenditures. The majority of this capital expenditure was towards fixed assets. 
  2. The company owner purchased $5,000 in investments and put it in the company’s account. 
  3. The company also spent 10,000 to acquire a patent for their new upcoming product. 
  4. In positive cash flows, the company received $20,000 from the sale of some previously owned investments. 

After you get all  these items on a cash flow statement table, you  calculate the sum of all these items to get the cash flow from investing activities. 

Using Investing Cash Flow for Growth and Capital 

As you can see from this investing activities example, Company X generated a negative cash flow from investing activities for the year. However, as discussed earlier, this is not necessarily  bad  for the company since such situations are the prerogative of companies in their initial years that are going through a growth phase. 

Evaluating the example, we learn that Company X invested heavily in PPE in totals of $30,000. This investment will help the company generate more capital in the future since PPE are purchased to improve and grow a businesses’ operations. 

Furthermore, the company owner also invested in marketable securities by purchasing stocks and adding them to the company’s account. If chosen currently, marketable securities, such as stocks, grow in value over time. The company owner can sell these stocks in the future to generate more cash flow for the company. This is clearly seen in the example since the company generates $20,000 in positive cash flow through the sales of previously owned stocks. 

The company investing in a patent is another good sign of growth. The company can use the patent to create a product that will help them generate more revenue and capital. 

It’s fair to say that the cash flow statement is an integral part of the three financial statements. This is because the cash flow statement bridges  the income statement and the balance sheet. As we discussed, the investing activities in the cash flow statement play an important role in evaluating the company’s performance by investors and other stakeholders. For these reasons, every small business should know how to generate and maintain a cash flow statement and list all the investment-related activities in the statement. 

Think your business’s cash flow is too intricate or complicated? We got you! Track your business’s investing cash flow using our accounting software, QuickBooks Online, and easily manage your business finances. 

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