What Are Investing Activities?
Being mindful of cash flow is essential for small business owners. Investing activities represent an example of cash flow that relates to the acquisition of long-term assets. A company's balance sheet generally reflects investing activities as one of the major net cash entries for any accounting period.
This article will explain investing activities in greater detail and show how they can appear on a company's statement of cash flows.
What Are Investing Activities?
Investing activities refer to two major kinds of net cash activities that appear in a company's investing section on its balance sheet: long-term assets and investments. Fixed assets, such as your business's real estate, vehicles, or other requisite machinery, are considered long-term assets. Investments include any cash paid to the principal amount of a loan held by a third party, cash equivalents, or trade securities held by the company. It's important to understand the difference between investing activities and operating activities.
Operating activities are strictly those that a company performs to secure income. For example, if a company purchases a new factory unit and pays for that building in cash, the cash outflows associated with that purchase would be considered an investing activity. By contrast, imagine that the company takes out a loan for that same factory unit. When the company begins making payments on that loan, the cash payments made toward the principal on the loan would be considered part of its long-term investments. In contrast, interest payments would be classified under the operating activities section.
What Are Some Examples of Investing Activities?
Investing activities are not only related to big purchases and stock options. There are a number of examples of business cash flow that can be classified as investing activities. Some of these investments represent immediate cash flow for your company, and others accrue value over time.
The following sections break down the most common kinds of investing activities for small businesses.
Investment purchases include any expenditures made by a business toward property, plant, and equipment (PP&E) or the purchase of marketable securities (such as stocks and bonds). PP&E expenditures are often also referred to as "capital expenditures." While cash flow certainly decreases any time a company makes a big purchase like this, investments that add to a company's current assets or represent the means by which a company can increase positive cash flow (such as through stock dividends) show that a business has verifiable growth possibility.
Investment Sales Proceeds
In the event that a company increases its overall capital assets via proceeds from the sale of PP&E or other equivalents, these investment sales proceeds count as investing activities. Natural depreciation may mean that all investments a company makes do not get sold for the same price for which they were purchased. Even the sale of long-term assets at a discounted or reduced price that causes the company to lose money on the investment overall still increases the cash flow amount that will appear in its balance sheet's investing activities section.
Fixed Asset Purchases
Generally speaking, companies acquire many of their fixed assets using credit rather than cash, as these assets tend to be among the more expensive. A few examples of fixed asset purchases would include a company acquiring another business, a new fleet of vehicles, or even the land on which future properties might be built. Each time that the company makes a payment on the loan used to acquire that fixed asset, the principal amount of that payment will appear as a decrease in the cash flow in the investing activities section of the statement of cash flows.
Fixed assets accrue more slowly and are not typically intended to represent cash for the company in question for at least the first year of their acquisition. Fixed assets of a smaller nature, such as computers, furniture, and software, may not become liquid for several accounting cycles.
Fixed Asset Sale Proceeds
Another way that a fixed asset can increase the cash flow in a company's investing activities is through the sale of that fixed asset. When a business sells off another business it owns, that sale is called divestiture. Any proceeds from that divestiture, or proceeds from the sale of any property, vehicle, computers, etc., that the company owns would all go into the balance sheet as investing activity cash received. Remember that even a sale wherein a business might not recoup its original investment amount shows up as an increase in its investing activity line item.
Understanding Investing Activity Cash Flow
Cash flow from investing activities is its own line item on a business's cash flow statement. The cash flow statement is one of the major financial statements that companies are responsible for preparing. Because they can indicate a company's current and potential prosperity, investing activities are among the most important line items to appear. There are different terminologies that a business owner needs to understand with regard to investment activities.
For example, reporting negative amounts of cash from investing activities is a good sign. How can negatives be good? Negative cash flow from investing activities means that a company is investing in capital assets. As the valuation of those assets grows, they increase the net cash flow available to the company over time. So, while investing activities may require short-term expenditures, they represent long-term gains.
The next two sections provide a bit more information on the cash inflows and cash outflows that come with investing activities.
Cash receipts from investing activities are known as cash inflows. Any cash that a business collects from the sale of long-term assets or the sale of a loan at a discounted rate counts as a cash inflow. Likewise, any selling or trading of marketable securities or the principal collected from third-party loans not generating sales are also examples of cash inflows in investing activities. Remember that not all money that comes into a business counts as a cash inflow. For example, suppose a company receives an interest payment from a third-party partner to whom the company has loaned money. In that case, that interest payment counts as an operating activity on the balance sheet, not an investing activity.
Cash outflows in investing activities impact a company's net income. These outflows include the purchase of long-term assets, the purchase of marketable securities, and the payment of principal loan amounts on third-party notes that do not generate revenue.
Let's say that a company acquires another business during a given accounting period. While that acquisition almost certainly cost money, either via direct cash outlay or credit, the net cash associated with the business that was bought would appear as an increase in the investing activities line item.
Let Skynova Help You Manage Your Small Business Financing Activities
Investing activities represent a dynamic part of any small business's accounting practices. The amount of cash appearing on a company's income statement can vary almost by the minute depending on its investing activities, and things can get hectic fast.
However, keeping up with investing activities so that your company can thrive is easy with insightful products like Skynova's accounting software. From deposit requests to purchase orders, Skynova's business templates can help your company stay on top of its current assets and prospects. Check out Skynova's software products today and streamline your company's small business accounting.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to learn the best course of action when making decisions about your company's investments.