Financial Explainer — investing cash flow

If you're looking to raise funding and/or plan to sell your business, it's vital you understand and can present your financials in a clear, coherent way. This can be a stumbling block for small business owners and managers who don't have financial expertise.

For this reason, we've put together a catalogue of simple and concise blog posts that cover each of the components of a set of financial statements.

In this edition, we're going to look at the second of the three sections of a cash flow statement — cash flow from investing activities.

Cash flow from investing activities shows how your company spends or earns money from its investments.

Cash paid out will be recorded as a negative number while cash received will be positive.

Here are the key components:

• Purchase of Property, Plant & Equipment (PPE)

  • This is money you've spent on buying things like buildings, machinery and vehicles.

  • It's included because these assets should help grow your business but require cash upfront.

  • Obviously a high amount suggests you're investing heavily for future growth.

• Sale of PPE

  • This is the money you receive when you sell fixed assets such as machinery, buildings or equipment.

  • It brings in cash and can show asset turnover or downsizing.

• Purchase of investments

  • This is money spent on buying shares or bonds.

  • It's included here because your company may be looking to earn returns on spare (and what would otherwise be idle) cash.

  • Obviously, the more you spend, the greater the reduction in your cash.

• Sale of investments

  • This is when you sell stocks or bonds.

  • It can be an indicator of liquidity and your level of investment returns.

  • If this figure is high, it could be because you want to free up cash for other needs.

• Acquisitions (buying other businesses)

  • This is the cash you spend on buying another company.

  • It's included here because your company may invest in other businesses to grow or diversify.

  • Large acquisitions tend to mean a company is trying to grow rapidly.

• Proceeds from asset disposals

  • This shows money you receive from selling other non-current, non-core assets, e.g. land.

Here's what this section of your cash flow statement should tell you:

• Negative cash flow from investing activities

  • Your company is spending more on assets than it's receiving from selling them.

  • This is normal for businesses that are growing but could be a concern if what you're spending is not delivering returns.

• Positive cash flow from investing activities

  • This shows that your company is selling more assets than it's buying.

  • This could indicate good financial management. However, if the figure is too high, it could suggest your company is shrinking or is in financial trouble.

• Impact on your overall cash flow statement

  • Investing cash flow doesn't affect your day-to-day operations directly but it does impact your future cash generation.

  • If your company spends wisely on assets, you could boost your future profits.

  • Conversely, if you're selling too many assets, you may struggle to generate revenue in the long run.