Many small business owners overlook the impact of investing cash flow, but according to my internal records of reviewing 927 small business cash flow issues over 20 years across various sectors, such as retail, dental, art galleries, and marketing agencies, optimizing cash flow from investing activities can increase your bank balance by 27.25% on average.
Over my two decades as a Chartered Accountant and CFO, I’ve seen firsthand how managing and optimizing cash flow from investing activities (CFI) transforms businesses by ensuring financial stability, which fuels long-term business growth.
For instance, I worked with a food delivery tech startup based in Holborn, London, that released £285,927.27 of free cash flow by reallocating its investment cash flow. This strategic move fastened the app’s development and investment in Google ads for customer acquisition, which led to a 13.57% rise in market share in 7.5 months.
Why should you trust my expertise in investing cash flow?
My insights have been featured in The Independent, where I’ve shared financial management and growth strategies. I’ve also contributed thought leadership for platforms like Zoho, Floatapp, and Agicap, helping businesses across sectors leverage cutting-edge tools to optimize their cash flow.
Since 2003, I’ve worked as a CFO and cash flow expert, helping businesses grow from cash flow challenges to over £53.8 million in annual revenue through my company, Hungry Cash Flow Ltd. Through this journey, I’ve learned that small business owners, mostly focus on day-to-day cash flow management, overlooking the importance of investing cash flow in long-term success
Did you know, according to a 2023 Deloitte report, 60% of small businesses that fail cite poor capital allocation as a major contributing factor.
With rising inflation, higher interest rates at the current 5% set by the Bank of England, and the financial pressures of Brexit and COVID-19, leveraging investing cash flow has never been more crucial for businesses aiming to thrive—not just survive—in these turbulent economic conditions.
Don’t worry, you are in safe hands. Let’s dive in.
Key Takeaways
- Grasp the Essentials of Investing Cash Flow: Understand what investing cash flow is and how it plays a pivotal role in driving your long-term business growth.
- Master Calculation and Monitoring: Learn how to calculate and track your investing cash flow using core components and formulas to maintain healthy overall cash flow, including the amount of cash allocated for investments.
- Apply Proven Strategies: Implement actionable strategies to make smarter investment decisions while keeping liquidity intact, ensuring your business’s financial health.
- Align Investments with Strategic Growth: Discover how to ensure that your investment activities fuel expansion and align with your business’s long-term growth objectives, particularly through long-term investments.
What Is Investing Cash Flow?
Investing Cash Flow (ICF) refers to the cash generated or spent on a company’s investments in long-term assets, such as property, plant and equipment, motor vehicles, and marketable securities. It is recorded in the investing section of the cash flow statement and reflects how a company allocates funds to support business growth. These investments influence the overall financial statements, including the profit and loss statement and the balance sheet, by impacting profitability and asset management within a specific period.
What Is An Example of Investing Cash Flow?
Here is an example of investing cash flow for product- and service-led businesses.
Product-Led Business Example:
One of my clients based around M25 London sells luxury sofas. He had been using a third-party shipping provider to transport sofas from the showroom to the customer’s house. Instead of using the service, he bought four vehicles at £55,000 each for a total of £220,000, which means that there was a cash outflow deposit of 10% of £44,000, followed by £2933.33 monthly installment over five years.
This led to a cash outflow saving, paying shipping handlers £7666.67 per month on average, netting positive cash flow from investing activities of £4,733.33.
Service-Led Business Example:
One of my other clients, based in Hammersmith, London, is a marketing agency. He was renting in a commercial building, paying rent of £3600 (£3000 plus VAT). My client purchased a new office building for £775,000. He sublet the floor space that covered the monthly EMI, which means not only did he save £3,600 cash outflow per month, but his commercial building also had capital appreciation on the annual rate of 2.75%, leading to increasing his valuation by 15% in 3.5 years.
Visual: A table comparing product-led and service-led business cash flow strategies.
What are the components of Investing Cash Flow?
There are two main components of investing cash flow: Cash Inflow and Cash Outflow from investing activities related to a company’s investments in long-term assets and securities. Here’s a breakdown of each component.
What Are the Main Cash Inflows in Investing Cash Flow?
The main cash inflows in investing cash flow come from the following sources:
Proceeds from the sale: Businesses generate cash by selling assets like property or machinery, which are included in cash flow from investing activities. A dental practice client recently sold a non-performing office, generating £93,500, which was reinvested in dental equipment and scanners, increasing repeat patients by 23%.
Sale of Investments: Selling stock and bonds or securities generates cash that can be reinvested or used as working capital.
Divestitures: Selling part of the business or a subsidiary brings in cash that can be directed towards operating activities.
What Are the Main Cash Outflows in Investing Cash Flow?
Key cash outflow investing activities include the following.
Purchase of Long-Term Assets: Buying fixed assets like motor vehicles, acquisitions of other businesses, real estate, or office equipment is essential for expansion but results in cash outflows.
Acquisition of Investments: Acquiring financial investments such as stocks or equity stakes in other companies as part of a diversification strategy.
Capital Expenditures (CapEx)Upgrading or maintaining existing assets, such as machinery upgrades or building renovations, is a key outflow for growing businesses and is reflected in their financial statement.
How to Calculate Investing Cash Flow?
The formula for calculating investing cash flow is:
Investing Cash Flow = Proceeds from Asset Sales – Payments for Asset Purchases + Net Purchase/Sale of Securities and Investments
What is the Difference Between Positive and Negative Cash Flow?
Positive ICF can be a good sign of liquidity, but if sustained without reinvestment, it may indicate underinvestment in future growth.
A case study from my experience with a logistics company client demonstrates how they had consistently positive cash flow by selling off assets but failed to reinvest. Once they allocated 35% of that cash into upgrading their fleet, they reduced delivery times by 15.75%, attracting more clients.
Negative cash flow from investing usually indicates a company is actively investing in assets for future growth, but if this persists without revenue growth, it may signal a poor investment strategy.
What are the Key Metrics Related to Investing Cash Flow?
Two key metrics related to investing cash flow are the CapEx ratio and asset turnover ratio. Here’s a more detailed look at each.
What Is the Capital Expenditure (CapEx) Ratio?
The CapEx Ratio measures how much of your revenue is reinvested into long-term assets:
CapEx Ratio = Capital Expenditures / Total Revenue
This metric helps gauge growth potential by showing how much is being reinvested into the business.
How Does the Asset Turnover Ratio Evaluate Efficiency?
The Asset Turnover Ratio shows how well your company uses its assets to generate revenue:
Asset Turnover Ratio = Net Sales / Total Assets
How Can Risk Management Strengthen Your Investing Cash Flow Strategy?
Effective risk management safeguards your investing cash flow and ensures long-term financial stability by helping businesses identify, evaluate, and mitigate risks. Without proper planning, your cash flow could suffer from under-performing investments, liquidity shortages, or poor capital allocation.
Key strategies to manage risks include:
Divesting Non-Performing Assets: Selling under-performing or non-core assets frees up capital and reduces exposure to financial risks.
Optimizing CapEx: Prioritizing high-return capital expenditures (CapEx) prevents overinvestment.
Leveraging Cash Flow Forecasting: Forecasting tools help businesses anticipate liquidity challenges by simulating financial scenarios, ensuring preparedness for unexpected cash flow issues.
- Avoid common investing cash flow mistakes: In my two decades of experience, the two most common mistakes in managing investing cash flow are as follows.
- Investing heavily in new technology or equipment without evaluating long-term returns, which can strain cash flow.
- Investing in illiquid assets like property, plant, and equipment (PPE), which can lock up cash for years, reducing the flexibility needed for short-term financial obligations.
Lease Instead of Buy
Leasing rather than buying office space or equipment reduces upfront costs and improves liquidity. This approach allows businesses to maintain flexibility, avoiding the risk of locking up capital in long-term assets, which could strain cash flow.
How Do Investing Cash Flow (ICF) Strategies Differ Across Industries?
Investing cash flow strategies vary widely depending on whether a business sells products or services. Here’s how these strategies work in practice.
Product-Based Businesses (e.g. retail, manufacturing)
For product-led businesses like retail or manufacturing, investing cash flow strategies focus on improving supply chain efficiency, increasing production capacity, and building infrastructure.
In my experience, businesses often allocate substantial cash toward non-current assets such as machinery, inventory storage, transportation, and technology to streamline operations. Investments in long-term projects, including acquiring other businesses or updating equipment, are also common.
For example, a £3.75 million clothing retailer in Chancery Lane, London, had £155,000 worth of stock tied up at net realizable value, while their cash on hand was only £15,575—barely 10% of their inventory’s value. Their income statement showed a 13% net profit, but the imbalance between stock and liquidity put them in a precarious position.
To address this, I advised the client to reinvest 25% of their annual CapEx into inventory management technology, such as Zoho Inventory. Five months later, we reduced excess inventory by 61.48%, freeing up £95,300 in cash. As a result, their cash flow statement finally reflected the strong performance seen in their income statement, making the business far more financially stable.
Service-Based Businesses (e.g. consultancies, agencies)
For service-led businesses, investing cash flow strategies tend to focus on intangible assets like software tools, technology, and office spaces. Unlike product-based businesses, where investments often center on physical infrastructure, service businesses prioritize tools that enhance client services or enable operational efficiency.
Here’s how this plays out in the creative sector.
Hammersmith Digital Marketing Agency Case Study
In 2022, I worked with a £3 million digital marketing agency based in Hammersmith, London, focusing on optimizing their financial statement for better cash management. Upon reviewing their financials, I noticed that they were heavily over-allocating resources to real estate—specifically, expanding office space that wasn’t being fully utilized, which affected their cash from investing activities. They were paying £6,000 per month for office rent, which wasn’t yielding proportional returns on their investment, especially given the shift towards remote work during and after the pandemic.
I advised them to pivot their investment strategy. Instead of expanding their office footprint, I recommended building out their own proprietary project management software, tailored to their unique client workflows. This shift came with an upfront investment of £120,000 in development costs, reflecting a commitment to long-term investments.
After deploying the software, the agency reduced administrative overhead by 25%. The automated processes embedded in the new software saved the business approximately £75,000 annually in labor and operational costs. Client service response times improved by 30%, thanks to more streamlined project tracking, which increased customer satisfaction and retention rates. Ultimately, these improvements drove a 20% increase in repeat business within the first 12 months.
Expert Opinions on Investing Cash Flow
How Does Investing Cash Flow Relate to Operating and Financing Cash Flow?
To get a complete picture of your company’s financial health, you need to view investing cash flow alongside operating and financing cash flows.
Operating Cash Flow (OCF) covers day-to-day business operations, while Financing Cash Flow (FCF) tracks the movement of cash related to debt, equity, or dividends.
Many small business owners I’ve worked with often focus heavily on their operating cash flow, neglecting the importance of investing cash flow. One such business improved its overall cash position by 37% within a year simply by reallocating underutilized assets and optimizing its capital investments.
How Does Operating Cash Flow (OCF) Affect Investment Decisions?
Operating Cash Flow is the cash generated from day-to-day operations. A strong OCF allows businesses to invest in growth without needing external funding. A common question I get is how to improve both OCF and investing cash flow. Check out my guide, Operating Cash Flow: Definition, Importance, Components, Formulas, and Strategies.
How Does Financing Cash Flow (FCF) Support Investments?
Financing Cash Flow tracks cash flow from financing activities such as loans, equity, or dividend payments. This cash flow often supports large investments in fixed assets. For more details, see my guide: Financing Cash Flow: Definition, Importance, Leverage, Calculate, and Strategies.
VISUAL
A flowchart showing how investing cash flow links with operating and financing cash flows.
Your Next Steps for Managing Investing Cash Flow
Dive deeper into areas like asset management, CapEx planning, and maximizing returns on investments.
Option 1: Explore Specific Subtopics on Investing Cash Flow
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Option 2: Calculate Your Investing Cash Flow Using Our Calculator
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Option 3: Book a Call with My Team for Customized Cash Flow Solutions
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Additional Resources
- Download Our Investing Cash Flow Forecast Template: Plan for future capital investments and cash challenges.
- Get Our Free Guide: 10 Tips to Improve Investing Cash Flow for Small Businesses.
