Cash flow from investing activities
Have you ever wondered how companies manage to invest in their business to grow it further? This is where understanding cash flow from investing activities comes in.
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- Cash flow from investing activities is a section of a company's cash flow statement showing the cash generated or spent relating to investment activities.
- Investing activities include purchases of long-term assets (such as property, plant, and equipment), acquisitions of other businesses, and investments in marketable securities (stocks and bonds).
- Negative cash flow from investing activities may not be a bad sign if management is investing in the long-term health of the company.
- Investing activities do not include interest payments or dividends, debt, equity or other forms of financing, depreciation of capital assets (even though the purchase of these assets is part of investing), and all income and expenses related to normal business operations.
What is cash flow from investing activities?
Cash flow from investing activities is the section of a company’s cash flow statement that displays how much money has been used in (or generated from) making investments during a specific time period. It includes purchases of long-term assets, acquisitions of other businesses, and investments in marketable securities.
Understanding cash flow from investing activities
The balance sheet provides an overview of a company's assets, liabilities, and owner's equity as of a specific date. The income statement provides an overview of company revenues and expenses during a period. The cash flow statement bridges the gap between the income statement and the balance sheet by showing how much cash is generated or spent on operating, investing, and financing activities for a specific period.
What are investing activities in accounting?
Investing activities include purchases of physical assets, investments in securities, or the sale of securities or assets. Examples include buying or selling long-term assets, acquisitions of other businesses, and investments in marketable securities.
What do investing activities not include?
Investing activities do not include interest payments, dividends, debt, equity, or other forms of financing, and all income and expenses related to normal business operations.
Calculating cash flow from investing activities
To calculate the cash flow from investing activities, the sum of long-term asset purchases, acquisitions, and investments in marketable securities should be added together, and any proceeds from sales of assets should be subtracted.
For example, if a company spent:
- £30 billion on capital expenditures
- £5 billion in investments
- £1 billion on acquisitions
- £3 billion from the sale of investments
The annual figure for cash flow from investing activities would be -£33 billion.
The importance of cash flow from investing activities
Cash flow from investing activities is significant as it demonstrates how a company is investing cash for the long-term growth of the business.
Negative cash flow from investing activities may be required in the short-term to invest in fixed assets such as property, plant, and equipment that generate positive cash flow in the long-term.
Investing in short-term marketable securities is another option for companies to enhance profit.
Have you ever thought about invoice finance to help improve your cash flow?
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
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