As a business owner, you’re probably hyper-focused on the cash flow from running a business. That’s because most businesses are more interested in profit generation than anything else. However, there’s hardly any business without any form of investing activities. And why is that? Because long-term investments are necessary if a business must scale financially. In other words, keeping track of your investing activities is the metaphorical engine power of every thriving business.
What are investing activities?
They are part of a company’s cash flow, usually reflected in the company’s statement of cash flows. Cash flow is the amount of money that comes into or leaves a company. Operating, Investing, and Financial activities, are the three basic categories of cash flow. Those cash activities related to assets that are not easily liquidated are investing activities.
Assets that aren’t easily liquidated are mostly long-term assets, also known as noncurrent assets. when a company makes long-term investments whose value will not be fully realized within the accounting year, such is known as a noncurrent asset. Therefore, it’s safe to say that all financial gains and expenses made on long-term assets (noncurrent assets) are investing activities.
Investing activities as an element of cash flow
As an element of cash flow, they are reported as “cash flow from investing activities”. This report is usually an integral component/section of every company’s statement of cash flow. It reports the amount a business spends or realizes from long-term investments within a given time. An increased cash flow from investing activities seems counterintuitive. But, it goes a long way to show how much a business is committed to long-term investments. If an enterprise decides to increase investment In property, plant, and equipment as fixed assets. It would seem that such an enterprise has incurred a negative cash flow from investing activities. However, in the long run, it becomes evident that the enterprise ended up accumulating funds for the future. More importantly, we can use cash flow from investing activities to rate a company’s growth.
Examples of investing activities
Financial activities considered as investing activities vary for every business and depend on the nature of the transaction. As a result, there is no metric for what should and shouldn’t be included here. A reliable method for knowing exactly what to include will be analyzing the balance sheet for the period. And taking into account the differences among noncurrent assets for the time.
Common financial activities to include as investing activities:
- Capital expenditures: The sales and purchase of property, plant, and equipment as long-term assets.
- Securities: Funds received from and deposited for stocks and bonds of other companies and other securities.
- Loans: this involves the principal sum on loans from other companies. Either a company is collecting the amount loaned or giving out an amount as a loan.
Common financial activities not included
- Funds realized from selling a land
- Funds, both income, and expenditure relating to day-to-day business operations
- Money paid for an investment in another company
- Funds resulting from interests and dividends
How to track your investing activities
As earlier explained, investing activities are a category of cash flow on the cash flow statement of a business. So, tracking these activities would mean tracking the cash flow resulting from investing activities. Bearing in mind that other forms of cash flow exist; like operating and financial activities. In this case, our focus is on cash flow due to the company’s long-term assets or noncurrent assets. Essentially, both small and big businesses engage in long-term investments for the future.
Optimize your cash flow statement
Generally, cash flow due to investing activities is usually reported as a negative number on the cash flow statement. And maybe misconstrued as poor performance for a business. In most cases, a negative cash flow due to investing activities depicts some kind of reinvestment or company expansion. This has to do with all funds the business transacts that will not yield value in the short run and are not easily liquidated. Examples include but are not limited to intellectual property, real estate, and equipment. Tracking your cash flow makes it so that you are sure of when funds come in to replace the funds that went out of the business.
Undertake scheduled capital expenses
Because these activities heavily involve long-term transactions, keeping track of such investments is a no-brainer. Capital expenditures create cash outflow while sales of marketable securities and other assets create cash inflow. It is important to undertake capital expenses on a schedule. This beats having to undertake huge expenses willy-nilly that can cause a business to go broke.
Make use of cash flow projections
This rides the thin line between a business plan and cash flow projections. However, you want to focus more on the cash projection beginning from cash in hand. You can always set up an accounts receivable calendar to track funds coming into the business. This financial organization and documentation make it easier for investors to get a good grasp on your investing activities. And ultimately monitor the growth and profitability of the business.
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FAQS: What are examples of investing activities?
Examples include capital expenditures, buying securities, and all cash activities resulting from long-term assets. These assets are otherwise known as noncurrent assets whose value appreciates in the long run. They’re usually not easily liquidated. Categories include tangible assets, intangible assets, and natural resources.
Why are investing activities important?
They’re important because they are relevant in forecasting the growth of a business in the long run. It’s a concrete representation of how a business allocates funds for the future. Therefore a negative cash flow due to investing activities will most definitely yield a positive cash flow in the future.
What is cash flow from investing activities?
It’s all funds entering and exiting a business as a result of dealing in long-term assets. On the cash flow statement of any business, its column accommodates all major financial dealings from noncurrent assets. Therefore cash flow from this activity is the net in a company’s profits and losses on investment over a specific period in time. It also accommodates any sales or purchases of noncurrent assets belonging to the company.
What are fixed assets?
They are property belonging to a company that generates funds called revenue for the company. Unlike current assets, they’re not easily liquidated within a year. And their value is not realized in the short run. Examples are intellectual property, real estate, and equipment.