Investment cash flow calculation

To understand investment cash flow, the concept of cash flow must be discussed. In the simplest of terms, cash flow is money moving in and out of a business. It can be said to be the incoming or outgoing of funds used for activities in an organization. Money is needed to start up and run a business, lack of money is the reason so many small businesses don't succeed. New business tends to see more of cash outflow than inflow, so mechanisms should be put in place to balance out the cash flow.

In running a company, one can experience positive cash flow or a negative cash flow. Positive cash flow indicates that the company is seeing an increase in liquid assets (money inflow) which enables it to pay its employees, settle debts, return money to shareholders etc. While a negative cash flow indicates the company is seeing a decrease in its liquid assets therefore running the company into debts. 

CASH FLOW INVESTMENT STATEMENT

To analyze how the cash comes in and goes out, a cash flow statement is prepared. A cash flow statement is used to look at changes in cash from different business activities. A cash flow statement has three categories: Operating cash flow which details day to day transactions of the company, investing cash flow which comprises of transactions which are done for expansion purposes and finally financing cash flow which contains amount of dividends paid out to stockholders.

INVESTMENT CASH FLOW

Cash Flow from Investing, otherwise known as investment cash flow can be said to be money allocated to long term assets which can be sold to generate future return, as well as collection of loans. Simply put, cash flow on investment has to do with the influx and out flux of funds on asset overtime. Activities like money gotten from sales of a property or equipment, money from liquidation of debt instruments, receipt from the selling of equity instruments, cash gotten from liquidation of assets like buildings, copyrights, cash gotten from selling bonds and shares etc, can be recorded as returns or profit while payment for a property or equipment, buying of debt instrument, acquiring of equity instruments, acquiring of bonds and shares etc can be recorded as losses or outflow. Both the inflow and outflow of funds are classified under investment cash flow.

CALCULATION FOR INVESTMENT CASH FLOW

To calculate investment cash flow, there is an addition of back losses and then a subtraction of the result from the addition of gains made which gives the result of an investment's net cash flow. The formula can be represented in this way:

ICF = P - L

Where

ICF = Investment Cash Flow

P = Profits

L = Losses

Example:

A Company dealing on agricultural products sells its fixed asset for $6000, bought stocks for $1000, spent $3000 on capital expenditures and made a general product sale of $2000. To find the investment cash flow:

The profit – the losses

(6000 + 2000) – (1000 + 3000) =

8000 – 4000 = 4000.

Therefore, the net investment cash flow equals $4000 which is positive.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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