Cash flow from financing activities is a section of a business’s cash flow statement. It details the cash flowing in and out of the company as a result of financing activities.
If you apply for funding or seek investment, the financier will use your cash flow statement and cash flow from financing activities to determine your business’s financial health.
It’s important to know what cash flow from financing is and how it impacts your ability to get funding.
Cash Flow Statement
The cash flow statement is one of three important financial reports that a company must generate regularly. The other primary reports are the income statement and the balance sheet.
With accrual accounting, income and expenses are reported as soon as invoices are raised, and bills are received. Companies using the accrual accounting method create regular cash flow statements to keep track of cash movement in a specified period, such as the previous month or quarter.
Cash Flow Types
The cash flow statement groups cash flows in and out of the business into three categories:
Cash Flow from Operating Activities
Cash flow from operating activities is the cash flow for everyday primary business operations. It includes any transactions related to net income or expenses resulting from operations.
Cash Flow from Investing Activities
This category relates to income and expenses from the company’s investments into capital assets. The purchase and sale of equipment, machinery, and property fall into cash flow from investing activities.
Cash Flow from Financing Activities
Cash flow from financing activities covers income and outgoings resulting from debt and equity financing, including dividends to shareholders and loan repayments.
The three cash flow types cover all of the money flowing in and out of the business over a set period. Categorising cash flow types helps business owners and potential investors gain a clearer picture of cash moving through the company.
Sample Cash Flow from Financing Activities Section
Below is an example cash flow statement from the Australian Accounting Standards Board. The cash flow from financing section is highlighted with the total net balance of cash flow from financing activities recorded at the bottom of the section.
In the example cash flow statement, the sample company had a negative cash flow from financing activities. The majority of the outflow of cash from financing activities relates to dividends paid.
What is a Financing Activity?
Financing activities are transactions that involve the flow of cash between a company and its source of finance. Cash flow financing activities can include:
- Borrowing and repaying short-term loans
- Borrowing and repaying long-term loans and liabilities
- Issuing or reacquiring its shares of common and preferred stock
- Paying cash dividends to shareholders
If a company borrows money for short or long-term periods or receives cash for bonds or shares, all proceeds are recorded as positive amounts in the cash flow from financing activities section. The positive transaction shows that cash has been received and therefore increased the company’s cash balance.
If a company repays short or long-term loans, purchases shares or pays dividends, the negative transaction is recorded in cash flow from financing activities. The transaction shows the reduced cash balance of the company.
Cash Flow from Financing Activities Formula
To calculate the total net cash flow from financing activities on the cash flow statement, accountants and chief financial officers use the following formula:
CED − (CD + RP) = Net Cash Flow From Financing Activities
CED = Cash inflows from issuing equity or debt
CD = Cash paid as dividends
RP = Repurchase of debt and equity
How to Calculate Cash Flow From Financing Activities in 5 Steps
Step 1: Add together the cash inflows generated from the issuing of debt and equity (CED).
Step 2: Add together total cash paid as dividends (CD)
Step 3: Add together all cash outflows incurred by repayment of debt and repurchase of equity (RP).
Step 4: Add together the cash outflows (CD + RP).
Step 5: Subtract the cash outflows (CD + RP) from the cash inflows (CED) to calculate the net cash flow from financing activities.
Here’s an example of how the cash flow from financing activities works for a sample company:
|Cash Inflows||Cash Outflows||Net Cash Flow From Financing Activities|
|Proceeds from long-term debt||$1,200,000|
|Payments to service long-term debt||$200,000|
|Payment of dividends||$150,000|
In the above example, the net cash flow from financing activities totals $750,000.
Determining a Healthy Cash Flow from Financing Activities Amount
There is no set amount that determines if a company’s cash flow from financing activities is healthy.
In general, investors and potential lenders are interested in how financing activities compare to operating activities.
A low or negative net cash flow from financing activities can indicate that your business is paying off its debts. But if your cash flow from operating activities shows a low figure, this can also suggest that you may struggle to continue servicing your debts.
If the bulk of your cash inflows is generated through debt, it may be an indication that your business is struggling to generate enough revenue.
Ideally, the cash flow from operating activities should be the primary source of cash inflows, with financing activities used to supplement growth or cover large one-off business expenditures.
Invoice Finance and Cash Flow From Financing
Invoice Finance is a form of accounts receivable financing that allows a business to convert its unpaid invoices into a source of immediate funding. Rather than waiting 30+ days for a customer pay, a company can use invoice finance to get up to 95% of the outstanding invoice value upfront as a cash advance. When the customer pays the invoice, the company receives the remaining invoice balance less fees.
Because the capital is not sourced by the sale of equity or through lending, cash inflows from invoice finance are considered an off-balance sheet form of funding and categorised as cash flow from operations. This allows a business to improve its leverage ratio and secure additional financing without breaching the terms of its existing loans of financing obligations.
If you’d like to find out more about accounts receivable financing, read our post ‘What is Invoice Finance?’.
While accounts receivable financing is not categorised as cash flow from financing, businesses are often required to disclose the funding arrangement as a footnote on their cash flow statement.
ScotPac Business Finance
If you’re trying to secure funding, it’s important that you keep your records up to date and accurate so that potential investors and lenders can evaluate your business’s financial health. Cash flow from financing is one of the areas they might use to determine your eligibility for finance.
We believe that every business should be able to access the funding it needs to grow. If you’ve been rejected by a traditional lender, there are still plenty of ways you can secure the financing you need. Give us a call, and we’ll guide you through your options so you can choose the funding solution that’s right for your business.