What Is Cash Flow From Investing Activities: Definition, Formula & Example

Introduction

When it comes to keeping your company’s finances in check, there are three key documents you need to pay close attention to: the balance sheet, income statement, and cash flow statement. These documents tell you about your business’s financial position, management efficiency, and whether it is positioned for growth. 

A cash flow statement provides substantial information on the company’s financial health and comprises three important sections:

1. Cash Flow from Operations (CFO)
2. Cash Flow from Investing (CFI)
3. Cash Flow from Financing Activities (CFF)

 In this blog, we will focus on understanding cash flow statements by examining cash flow from investing activities, its components, examples, and how to calculate it.

What is Cash Flow from Investing Activities?

Cash flow from investing activities is a part of the cash flow statement that reports the cash inflows and outflows resulting from the investment activities. These activities primarily involve the acquisition and disposal of long-term assets such as property, plant, equipment, and investments in marketable securities.

Any moderation in the cash position of a company that involves fixed assets, investments in securities, mergers, and acquisitions would be accounted for under cash from investing activities. 

For example, if a business owner invests in a new factory building to expand its operations, that purchase would be considered a cash outflow from investing activities. Similarly, if they sell some old machinery the company no longer needs, the cash received from the sale would be a cash inflow from investing activities.

What is Included in Cash Flow from Investing Activities?

Cash flow from investing activities includes various cash transactions incorporating the nature of the acquisition and disposal of long-term assets are included in cash flow from investing activities. It also encompasses loans made to third parties and the collection of loans made by the entity.

These are:

• Capital expenditure involving the acquisition of fixed assets, plant and machinery 
• Proceeds from sales of fixed assets
•  Purchase of investment securities, bonds, debentures, and stock
•  Proceeds from sales of investment securities bonds, debentures, and stock
• Acquisition of another company
• Proceeds from sales of other business units

What is Not Included in Cash Flow from Investing Activities?

Cash flow from investing activities excludes certain transactions, despite their broad scope. These typically include short-term investments or cash equivalents, which are classified under operating activities. Additionally, cash flows from financing activities are also not included. 

Cash flow from investing activities does not include the following:

• Cash received from sales of goods and services
• Salary payments 
• Payments made to vendors and suppliers
• Tax-related payments
• Interest payments
• Payment of dividends
• Stock repurchase
• Expenses related to asset depreciation
• Debt and equity financing 
• Income and expenses related to business operations

How to Calculate Cash Flow from Investing Activities? 

To calculate cash flow from investing activities, add the purchases or sales of property and equipment, other businesses, and marketable securities.

These items are all listed in a cash flow statement, but can also be identified by comparing non-current assets on the balance sheet over two periods.

Example of Cash Flow From Investing Activities

Let’s analyze Hershey’s net annual cash flow from investing activities for the year 2023 from its consolidated cash flow statement.

During the year, the Hershey Company made significant investments in capital expenditures, primarily directed towards acquiring fixed assets to support its operations. The company allocated 771,109 thousand dollars towards capital expenditures, reflecting its commitment to expanding infrastructure and enhancing technological capabilities.

To calculate Hershey’s net cash flow from investing activities, we sum up the cash outflows and inflows:

• Cash outflow: Capital Expenditures: – $771,109 thousand
• Cash outflow: Equity investments in tax credit qualifying partnerships: -$ 256,815 thousand
• Cash outflow: Business acquisitions, net of cash and cash equivalents acquired: -$165,818 thousand
• Cash outflow: Other investing activities: -$ 4,934 thousand

Using the cash flow from investing activities formula, let us now calculate the net cash flow from investing activities for Hershey’s. 

Net Cash Flow from Investing Activities = (-$771,109 thousand) + (-$256, 815 thousand) + (-$165, 818 thousand) + (-$4934 thousand) = -$1,198,676 thousand

Thus, for the year 2023, Hershey’s recorded a net cash flow from investing activities of -$1,198,676 thousand. 

How HighRadius Cash Management Software can Streamline Cash Flow in Financial Statements?

Effective cash flow management encompasses more than a simple deduction from the inflow and outflow calculations. Developing efficient cash management is critical to growing healthy cash flow for any business. These approaches not only fortify the business during adversity but also improve cash visibility. 

With HighRadius Cash Management Software, you can boost cash flow by eliminating manual processes, enhancing productivity, and reducing errors while keeping a tab on cash positions in real-time. Additionally, you get: 

• Daily cash positioning with real-time bank data across geographies and currencies
• Reduced reconciliation delays and better decision-making with automated cash-to-bank reconciliation. 
• Streamlined debt and investment tracking through integrated cash flows with cash position and forecasting manager.
• Stay up-to-date with market holidays globally for accurate business day information.

The impact? You experience

• 100% automated bank integration
  You can leverage out-of-the-box support for standard banking formats used by all major banks (BofA, Citi, ING, Chase, HSBC, etc.).
• 70% increase in cash management productivity
  Your team can focus better on supercharging financial performance when they don’t have to deal with error-prone, manual processes.
• Reduce idle cash by 50%
  Your team can predict cash in different accounts and help you make the right investment decision to earn better returns.

FAQs

1. How to find net cash flow from investing activities?

To find the net cash flow from investing activities, sum up all cash inflows and outflows related to investing activities. Cash inflows typically include proceeds from asset sales, while outflows include purchases of investments. Subtract the total outflows from the total inflows to calculate the net cash flow. 

2. How to prepare cash flow from investing activities?

To prepare the cash flow from investing activities, summarize all cash inflows and outflows related to investments. Inflows include proceeds from asset sales, dividends received, and interest earned on investments. Outflows include purchases of property, plant, equipment, and investments.

3. What does positive net cash flow from investing activities indicate?

A positive net cash flow from investing activities indicates that a company is generating more cash from its investing activities than it is spending. This suggests that the company is effectively managing its investments, potentially acquiring assets or making strategic investments to enhance future growth and profitability.

4. Why is cash flow from investing activities important?

Cash flow from investing activities provides insights into a company’s capital expenditure and investment strategies. It helps stakeholders assess the company’s ability to invest in growth opportunities, acquire assets, and manage its long-term financial health.