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5 Ways that Businesses Measure Cash Flow

Cash Flow From Investments
When you purchase a space for your business, you'd list that under cash flow from investments.
When you purchase a space for your business, you'd list that under cash flow from investments.
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When a company issues a statement of cash flows, it divides the statement into three sections: cash flow from operations, cash flow from investments and cash flow from financing. We already discussed cash flow from operations, which focuses on the cash earned and spent through core business activities. Now let's look at cash flow from investments.

What kinds of cash transactions fall under the category of investments?

  • Purchase or sale of equipment
  • Purchase or sale of real estate
  • Purchase or sale of securities (stock, bonds, futures, options, etc.)
  • Lending money to other businesses or entities

For cash flow purposes, investing in an asset or bond is a "cash out" transaction. The business spends money in the short-term with the hope of long-term cash gains in the form of increased productivity from new equipment or returns from high-growth securities. If a company has high operational cash flow, but low earnings, check the cash flow from inventory. It could be that the company is investing its cash aggressively for future growth.

If a company sells stock or sells off some of its assets, those are "cash in" transactions. A smart investor will try to reconcile the statement of cash flows and the earnings report. It's quite possible, for example, that a company is reporting high earnings, but negative operational cash flow. In that case, perhaps the company has sold off assets (equipment, property, even parts of the company) to get more cash. The cash flow from inventory statement would make that clear.

Next we'll look at cash flow from financing, the third section of a cash flow statement.

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