Investing activities are the second main category of a business activities. It refers to the purchase and sales of long-term assets and other business activities. These activities are related to expanding a business and gaining bigger profits to a company in the long term.
It is listed on the cash flow statement and consist of buying and selling long-term assets and other investments. In other words, it is the net amount of cash received and paid during a financial accounting period for long-term assets and investments.
Why are Investing Activities Important?
Investment activities are necessary for supporting growth of a business in future. By investing in long term assets, companies expect to get more revenue and make higher profits. The prospect of higher profits is positive point to stock investors, which will see a rise in stock prices. For creditors or banks, more profit means more cash inflow, means the company has a higher probability to repay debts.
To increase production, companies need to buy new equipment or build bigger factories. It requires lot of cash. Therefore, the negative cash flow of investing activities is one good indication that businesses invest in capital assets. You will see their income growth in the future.
Is the Negative Cash Flow from Investments bad?
Negative net cash flow from investing activities is not always bad. Sometimes a company need to sacrifice money in present time to grow a business in the future. By investing cash in long term assets, the company can generate large cash inflows in the future.
Cash flow from investment activities also depends on the company’s age and its type of business. Start-up companies may have negative net cash flow. They need significant capital expenditure to develop their business and be competitive in the market.
But, capital expenditure may not be efficient if it does not increase profits. Therefore, it is necessary for a company to have a specific investment strategy.
What do Investing Activities not include?
Investing activities don no include:
- Payment of interest or dividends
- Equity, debt, or other forms of financing
- Depreciation of capital assets (even though the purchasing of assets is a part of investing)
- Income and expenses related to daily business activities.
What Are Examples of Investing Activities?
- The Purchase of Investments: If a company purchases an investment in cash, such as stocks, bonds or any other type of investment, the price of that investment will mean a decrease in the company’s cash flow from investing activities. Because cash is going out of a business.
- Proceeds from the Sale of Investments: When a company sells off one of its investments for cash, the sale will result in an increase in cash flow from investing activities. Even in the case where a company sell the investment in less price than the purchase price, the cash flow from investing will still on positive side.
- The Purchase of Fixed Assets: Fixed assets such as land, building, furniture and vehicles are usually purchased on credit, not using cash. Because of that, the purchase of fixed assets usually shows up in the cash flow on investing activity section slowly over time. Every time the company does a cash payment toward the credit purchase (for example, Rs 1,00,000 per month over the span of a year), it will show up as a decrease on the cash flow on investing activity section.
- Proceeds from the Sale of Fixed Assets: When a company sells a fixed asset, such as its property, a used vehicle or computer parts, the proceeds of the sale are recorded as an increase in its cash flow on investing section.