by Sam Franklin | August 01, 2022 | 9 min read
Cash flow from investing activities - all you need to knowGet funded
Last updated: September 02, 2022
As your business grows, you’re likely to start looking towards expanding your empire through investment.
That’s great. However, an investment is only as good as the amount of return you get from it. But how exactly do you measure the profitability of your investments?
CFI is the answer.
Cash Flow from Investing Activities (CFI) is one of the three sections presented on your company’s cash flow statement, alongside cash flow from operations and cash flow from financing activities.
CFI tracks the cash inflow and outflow from your investing activities. Like all key cash flow metrics, it gives you the net amount of cash generated (or lost) in a specific period of time, aka the accounting period.
We will cover what these investing activities are in this article. The important thing to remember now is that CFI solely tracks cash from investing activities.
Read on to learn the lowdown on what cash flow from investing activities really is, the basics of how it’s calculated, and what it tells you about your business.
Table of contents
- What is cash flow from investing activities?
- Items to include in cash flow from investing activities
- What NOT to include
- How to calculate cash flow from operating activities
- Importance of cash flow from investing
- Key points when analysing cash flow from investing activities
- The bottom line
What is cash flow from investing activities?
The cash flow from investing activities section reports how much money has been spent (or generated) from various investment activities.
Investing activities include purchasing and selling investments, as well as earnings from investments. We’ll take a closer look into the different types of investing activities in a moment.
Like all cash flow, CFI is the net amount of cash flow for a specific time (accounting period). It comprises all the transactions of buying and selling non-current assets and marketable securities.
Non-current assets (long-term assets) are assets that are expected to deliver value and benefits in the long run (1+ years). They're highly illiquid, meaning that they can’t be easily or rapidly converted to cash.
Marketable securities (stocks, bonds, shares, etc.) are a lot more liquid, meaning they’re much easier to convert to cash.
Typically, when analysing cash flow, negative means bad. But, with cash flow from investing, this is not always the case - your cash flow will take a hit when investing for future growth. It’s simple mathematics.
In short, you’re investing significant amounts of cash into the long-term health of your company for the long-term gains of your operations. During the months of heavy investment and large purchases, a net negative cash flow will be reported in your cash flow from investing statement.
Items to include in cash flow from investing activities
CFI includes a whole range of investing activities that involve the cash purchases and disposals (selling) of non-current assets.
When you expand your company, you’ll look to invest in property, plant, and equipment (PP&E). This is a type of capital expenditure, CapEx.
As mentioned previously, you may also spend cash on purchases of marketable securities, such as stocks in other companies, which can earn you dividends and be easily converted to cash.
Here’s a list of typical investing activities included on the CFI statement:
Purchase of property plant and equipment/CapEx - cash outflow.
Selling off or leasing PPE - cash inflow.
Investment in marketable securities such as stocks and bonds - cash outflow.
Selling off marketable securities - cash inflow.
Acquisition of businesses and companies - cash outflow.
Selling off businesses and companies - cash inflow.
Lending money - cash outflow.
Collecting loans - cash inflow
What’s included in cash flow from investing activities is company-specific. To find out, start by looking at your balance sheet - identify the non-current assets, and then analyse any differences in values over the two periods. Any changes in value mean these items need to be included in the CFI statement.
What NOT to include
When calculating your cash flow from operating activities, it’s important to know what shouldn't be included. For example:
Income and expenses related to normal business operations.
Debts acquired, and equity financing.
Interest earned or paid
Depreciation of capital assets (even though the purchase of capital assets is included).
How to calculate cash flow from operating activities
These days, automated accounting software can do the job for you. If you don’t have it, no stress as it’s fairly straightforward, and even if you do - it’s really important to understand how it’s done.
In short, you add up all the cash inflow from the sale of non-current assets and any money received from the sale of marketable securities. Then you subtract the costs of purchasing non-current assets such as equipment or securities. The total will give you your CFI.
Cash flow from investing activities formula:
There isn’t a singular agreed-upon formula, but the following formula is generally accepted:
Cash flow from investing activities = CapEx/purchase of non-current assets + marketable securities + business acquisitions - divestitures.
*divestitures = the sale of investments
Investing activities example:
Let’s take the case of Vincent to see how investing activities affect the cash flow statement.
Vincent, a bastion of British manufacturing, produces high-quality e-bikes. He and his team produce them out of his workshop - selling them across Europe via his eCommerce store.
Business has steadily grown over the last few years, but in the last few years, the e-bike movement has really taken off.
As a result, Vincent’s orders have grown tenfold, and he’s struggling to keep up with demand - his operations are at max capacity, and he’s frequently selling out of stock.
As a result, Vincent wants to upscale quickly. He needs to move into larger premises and create a dedicated factory.
The first step Vincent takes is to release some cash. His business has a 100k invested in a bike accessories business that hasn’t been performing particularly well. He decides to sell his 25% stake to liquidate the 100k.
He finds the perfect new premises - fit for industrial use with a warehouse and office. He purchases for £500k.
Vincent needs to buy more equipment but also figures that much of his existing equipment is outdated and could do with being replaced. Therefore, he sells off his existing equipment for £25k and purchases his new equipment for 100k.
He sells his old workshop for £300k – since purchase, the area has become a very trendy suburb. Vincent got 50k more than he expected.
With this extra 30k, he decides to invest in marketable securities – specifically manufacturers of batteries and other components related to e-bike manufacturing.
His ex-employee is starting his own metal fabrication business and asks Vincent if he would like to partner. Vincent knows his ex-employee well and is impressed with his pitch - he declines full partnership but decides to partner at 20%. He gives his ex-employee £20k.
Vincent’s balance sheet:
So, as you can see, in the case of Vincent’s investing activities example there is a negative net cash flow from investing activities of -£225k. This is to be expected and not at all a need of concern. As shown in Vincent's example, companies with negative cash flow from investing generally mean they’re in a growth state.
Another aspect to note about Vincent’s example is how he liquidated his 25% stake (£100k) in order to reallocate funds into the CapEx purchases of factory and equipment. He eventually reinvested 30k into tech stocks which are highly liquid and therefore easy to convert to cash if needs be.
Importance of cash flow from investing
By now, you should be building a pretty good understanding of cash flow from investing activities. The points below summarise the importance of cash flow from investing:
CFI gives you a clear breakdown of how much money you’ve spent on future growth and how consistently investments are being made.
Over time, you can track how your cash is being allocated to future growth and compare it to operating cash flow to see if your investments have paid off and boosted cash flow.
You can identify how much cash is in marketable securities, which are highly liquid and can be used to free up cash when needed.
You may also choose to invest cash in short-term marketable securities to help boost profit through dividends.
The cash balance from investing activities can be an important source to offset negative cash flows from operating activities.
It’s important to use the information from the investing activities in conjunction with information from other financial statements.
For example, after investing heavily, net cash flow may show as negative, which may ring alarm bells. However, by analysing cash flow from investing activities separately, you can clearly see why - cash has been used for investing for future growth.
On the other hand, if your operating activities were causing this negative cash flow, there would be a real cause for concern.
Key points when analysing cash flow from investing activities
We’ve learned the importance of cash flow from investing activities. Now let’s take a look at some of the key points that you, investors, and analysts should consider when analysing cash flow from investing activities:
Consistent negative investing cash flow can be a healthy sign of a growing company which can give positive returns down the line.
A drop in fixed-asset investment could signify that a company is no longer profitable.
If your company is consistently investing in CapEx, but over time, there is no increase in cash flow from operating activities to reflect this investment, then it might mean overcapitalisation - you’re investing heavily but not seeing the gains by an increase in operating cash flow. If this continues, it can lead to a big cash flow bottleneck which would spell big trouble for operations.
If a company is consistently reducing investments in fixed assets, it can be a signal that the company doesn’t believe there are potential opportunities in its current business.
A drop in fixed asset investments could also mean that the company has no cash or sources of funding available. In other words, it’s not generating a net positive cash flow or profit.
The bottom line
So there you have it, everything you need to know about cash flow from investing activities and more.
It’s not all about positive cash flow when it comes to cash flow from investing. You should analyse cash flow from investing activities alongside the other cash flows on your cash flow statement to get a clear picture of your business’s ability to generate cash.
Wise long-term investments will boost your cash flows from operations and ultimately boost your company’s financial health. For more information on how to increase your cash flow, please check out our article on common cash flow problems for small businesses.
Before making any investment, it’s important to undergo extensive financial planning by running your business investments through a cash flow forecast. This will show you the impact your investment-related activities will have on your cash flow statements and tell you how much cash you might need to get funded.
Sam founded his first startup back in 2010 and has since been building startups in the Content Marketing, SEO, eCommerce and SaaS verticals. Sam is a generalist with deep knowledge of lead generation and scaling acquisition and sales.