What Is Cash Flow from Investing Activities?
Generally, 'cash flow' means money coming in and leaving a company. This may occur from incurring debt and selling goods and services. Cash flow from investing activities comes in a variety of forms. Businesses may receive money from investors, or distribute money to investors. Accounting information about cash flow is particularly useful to financial managers attempting to determine the most lucrative investments.
When discussing cash flow from investing activities, the term 'investor' may include both the company’s shareholders and its debtors. This doesn’t include debt financing from accrued expenses or accounts payable. Those types of cash flows are recognized prior to calculating investment cash flow. Accountants recognize those types of debt financing as operational or working capital.
Cash flow from investing activities happens when a company pays interest to creditors or dividends to stockholders. These are examples of cash outflows. Paying down, or decreasing, outstanding debt is another investing activity that results in a cash outflow. Sometimes, a company in poor financial health must repurchase its own stock, resulting in another kind of outflow of cash.
Inflows of investment dollars may come from increasing outstanding debt or issuing stock. Less common forms of cash flow from investing include the sale of interest-bearing, short-term bank notes, and other forms of interest-bearing liabilities. The business incurs some financial liability if the capital flows in from either debt or stock. Debt must be paid back, plus interest, and shareholders expect dividends.
Many financial managers prefer cash flow from stock to that from debt, because interest compounds the cost of debt capital. Plus, creditors often set how much cash must be paid, and when. For common stock, the company may set the amount and timing of dividend payments. This isn’t the case for another type of stock, known as preferred stock.
For preferred stock, the business must pay shareholders a set dividend. The payment amount of dividend and what type of stock to offer is a major concern of many financial managers when budgeting cash flow from investing activities. Many companies attempt to keep cash flowing in an endless cycle of purchasing, incurring, paying, and selling. A business may invest, or pay, when there is excess cash — and sell, or liquidate, when funds are short.
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