Cash Flow From Financing Activities: Definition, Formula & Examples

Introduction

The proper management of your company’s financial health involves the regular monitoring of three major financial indicators, and these are the balance sheet, income statement, and cash flow statement. This helps in knowing the company’s financial performance, managerial skills, and scalability and is therefore required for the investor, the management, the shareholders, and the analyst to make a well-informed decision.

A cash flow statement provides substantial information on the company’s financial health and comprises three important sections:

1. Cash Flow from Operations (CFO)
2. Cash Flow from Investing (CFI)
3. Cash Flow from Financing Activities (CFF)

In this blog, we take a deep dive into understanding the cash flow from financing activities with some real-life examples and how advanced cash management software enables us to optimize cash flow. 

What Is Cash Flow From Financing Activities?

Cash flow from financing activities (CFF) gives a picture of how a company raises and spends money through the intermediates of issuing stocks, borrowing, debt repayment, and paying dividends. A vital component of the cash flow statement it helps assess a company’s financial stability and growth tactics.

CFF provides insights into a company’s financial strength and how well a company’s capital structure is managed.

What is Cash Flow in Financial Statements?

The cash flow statement is a pivotal financial statement that provides a comprehensive overview of a company’s cash inflows and outflows during a specified period. It is a key indicator of a company’s liquidity and cash positions and provides valuable insights into a company’s operational efficiency and financial health. The cash flow statement consists of three sections:

• Cash flow from operations (CFO)

  Cash flow from operations (CFO) showcases the cash inflows and outflows from an enterprise’s daily activities and operations. It includes sales income, which includes both cash and credit payments. It also accounts for an organization’s operational expenses, such as wages, account payables, vendor bills as well costs like depreciation.

• Cash flow from investing (CFI)

  Cash flow from investing (CFI) shows a company’s purchases and sales of capital assets. It reports the aggregate change in the business cash position as a result of gains and losses from investments in items like plant and equipment. These are considered long-term business investments. 

• Cash flow from financing activities (CFF)

  Cash flow from financing activities (CFF) provides an overview related to the cash exchanges between a company and its stakeholders, such as investors and creditors. It includes debt, equity, and dividends, and showcases the overall movement of funds for running the business.

Capital Funding: Debt vs. Equity

CFF depicts how a firm raises money to ensure seamless operation or to scale up. Organizations raise funds either through debt or equity. If an organization plans to borrow money, they do so by securing loans as well as by selling bonds. In both cases, they have to pay interest to their creditors as well as bondholders. 

When a company opts for an equity route, it issues stocks to investors, who now become shareholders. A cost associated with equity is dividend payments, which companies might opt to pay their shareholders.

Cash Flow from Financing Activities Formula

The cash flow from financing activities formula is the sum of all cash inflows and outflows. This includes stock repurchases, dividend payments, debt issuance, and debt repayment. In this formula, cash outflows are negative numbers and are represented within parentheses.

In the CFF formula, debt and equity issuances are shown as positive cash inflows since the business is raising capital (i.e., cash proceeds). In contrast, share buybacks, debt repayments, and dividends are represented within parentheses to signify that the item is a cash outflow. 

• Debt Issuances → Cash Inflow
• Equity Issuance → Cash Inflow
• Share Buybacks → Cash Outflow
• Debt Repayment → Cash Outflow
• Dividends → Cash Outflow

What are Investing Activities in Cash Flow?

Cash from investing activities denotes utilizing the cash for long-term activities involving the purchase or sale of fixed assets, business acquisitions, and mergers, and investing in marketable securities. It showcases the amount of cash a company has raised or spent via investments in a particular period.

Any moderation in the cash position of a company that involves fixed assets, investments in securities, mergers, and acquisitions would be accounted for under cash from investing activities. 

For example, if a business owner invests in a new factory building to expand its operations, that purchase would be considered a cash outflow from investing activities. Similarly, if he/she sells some old machinery the company no longer needs, the cash received from the sale would be a cash inflow from investing activities.

How to calculate cash from investing activities formula?

While there is no universal formula to calculate cash flow from investing activities, the formula that is generally accepted across the globe is: 

Real-World Cash Flow from Financing Activities Example

Companies disclose cash flow from financing activities in their annual financial reports to shareholders. For instance, in the fiscal year 2023, Peloton (the fitness tech giant) reported a net cash flow of -$305.4 million, with cash flow from financing activities amounting to $76.8 million. The components of its cash flow form financing activities are listed in the table below.

Here, we can see CFF for Peloton for 2023 involves more cash inflows related to proceeds from employee stock purchases and exercise of stock option. The cash outflow involved repayment of term loan and finance leases. As cash inflow exceeded cash outflow the CFF was positive for Peloton in 2023. 

How HighRadius Cash Management Software can Streamline Cash Flow in Financial Statements?

Effective cash flow management encompasses more than a simple deduction from the inflow and outflow calculations. Developing efficient cash management is critical to growing healthy cash flow for any business. These approaches not only fortify the business during adversity but also improve cash visibility. 

With HighRadius Cash Management Software, you can boost cash flow by eliminating manual processes, enhancing productivity, and reducing errors while keeping a tab on cash positions in real time. Additionally, you get:

• Complete cash visibility and real-time bank data access with integrations with all major banks.
• Easy navigation between dashboards, cash positions, and financial instruments with data auto-filling seamlessly.
• Reduced reconciliation delays and better decision-making with automated cash-to-bank reconciliation. 
• Streamlined debt and deal tracking through integrated debt and investment cash flows.

The impact? You experience

• 100% automated bank integration You can leverage out-of-the-box support for standard banking formats used by all major banks (BofA, Citi, ING, Chase, HSBC, etc.).
• 70% increase in cash management productivity Your team can focus better on supercharging financial performance when they don’t have to deal with error-prone, manual processes.

FAQs

1) How to calculate dividends paid in cash flow statements?

To calculate dividends paid in cash flow statements, subtract the net change in retained earnings from the annual net income. This formula reflects the portion of profits distributed to shareholders after accounting for changes in retained earnings, representing dividends paid out during the period.

2) Where do dividends go in the cash flow statement?

Dividends paid are typically categorized under financing activities in the cash flow statement. This section outlines the cash flows related to the company’s financing activities, including dividends distributed to shareholders as a return on their investment in the business.

3) Is paying dividends a financing activity?

Yes, paying dividends is considered a financing activity. It involves the distribution of a company’s earnings to shareholders as a return on their investment in the company, which falls under the category of financing activities in the cash flow statement.

4) What are some examples of cash outflow from financial activities?

Cash outflows can be included in financial activities such as repayment of loans, where the company returns borrowed funds with interest to creditors, stock buybacks, where shares that the company buys from investors, and dividend payments where an organization pays its shareholders.

5) What are some examples of cash inflows from financing activities?

Some examples of cash inflows from financing activities are stock issuance, borrowings, and other financing arrangements. For example, company revenue may be achieved through issuing bonds, obtaining loans from banks or receiving cash in exchange for equity participation in the company.

6) What is positive and negative CFF?

Positive cash flow from financing activities indicates a net increase in cash resulting from financing activities, such as raising capital or obtaining loans. Negative CFF indicates a net decrease in cash due to financing activities, like repaying debt or buying back shares.