Cash flow from financing activities refers to the inflow and the outflow of cash from the financing activities of the company like change in capital from the issuance of securities like equity shares, preference shares, issuing debt, debentures, and from the redemption of securities or repayment of a long term or short term debt, payment of dividend or interest on securities.
It is the last of the three parts of the cash flow statement that shows the cash inflows and outflows from finance in an accounting year; Financing activities include cash inflows that are generated from getting funds like inflows from receipts from the issue of shares, receipts from a loan taken, etc. and cash outflows that are incurred while repaying such funds such as redemption of securities, payment of dividend, loan & interest repayment, etc.
In a nutshell, we can say that cash flow from financing activities reports the issuance and repurchase of the company’s bonds and stock and the payment of dividends. It reports the capital structure transactions. Items are found in the balance sheet's long-term capital section and the statement of retained earnings.
Common items included in the cash flow from Financing activities are as follows –
It is of the view for many investors that cash at the end of the king.
If a company has surplus cash, it can be assumed that it operates in the so-called safe zone. Suppose a company is consistently generating more cash than the cash used. In that case, it will come out in the form of dividend payments, share buybacks, reduction in debt, or case of acquisitions to grow the company inorganically. All of these are perceived as good points to create good stockholder value.
Let us look at how this section of the cash flow statement is prepared. Understanding the preparation method will help us evaluate what all and were all to look into so that one can read the fine prints in this section.
Let’s assume that Mr. X has started a new business and has planned that he will prepare his financial statements like income statement, balance sheet, and cash-flow statement at the end of the month.
1 st month: There was no revenue in the first month and no such operating expense; hence, the income statement will result in zero net income. In cash flow from financing activities, the cash would increase by $2000, as that is Mr. X's investment in the business.
Cash from Financing activities (end of the first month) | |
Investment by Mr. X (Owner) | $ 2,000 |
if you are new to accounting, you can also look at the finance for non-finance tutorials.
Let’s take an example to calculate Cash Flow from Financing activities when Balance Sheet Items are provided.
Below is a balance sheet of an XYZ company with 2006 and 2007 data.
Also, assume that the Common dividends declared - $17,000
Calculate Cash Flow from Financing.
To prepare the cash flow from Financing, we need to look at the Balance Sheet items that include Debt and Equity. Besides, we need to include the cash dividends paid as cash outflows here.
Cash Flow from Financing Activities Formula = $10,000 - $20,000 - $7,000 = $17,000
Now let us take an example of an organization and see how detailed cash flow from financing activities can help us determine information about the company.
This article is another major component of cash spending, and investors look at it in detail. It is indicative of the kind of financing activity undertaken by the company in a particular area. In FY15, Apple incorporation spent $20,484 million in financing activities. A few observations from the above cash flow from financing activity parts are:
Let's now look at another company’s cash flow from operations and see what it speaks about the company. It is the case of an e-commerce venture Amazon Inc. The company, for years, didn’t generate accounting profit, but investors kept putting money into the company on the backdrop of the sound business proposition and huge cash generated from operations.
The above image is a historical representation of the cash flow from its financing activities of Amazon. We note the following about Amazon's Cash Flow from Financing activities calculations –
Till now we have seen one product and one Service Company. Now let us have a look at one of the banking majors. It will give us good coverage of how companies classify different functions under 'cash flow from financing activities.'
Since this entity is a bank, many line items will be completely different from what it is for others. Many line items are only applicable to banks or companies in financial services. A few observations from the above statements are:
Download Excel Examples to Calculate Cash Flow From Financing
Until now, we have seen three companies in three different industries and how cash means different things for them.
For a product company, cash is the king. For the service company, it is a way to run a business, and for a bank, it is all about cash!
These three companies have different things to offer in the cash flow from financing activities part of the cash flow statement. However, it is crucial to understand that the statement should not be singled out and seen. They should always be seen in conjunction with other statements and management discussion & analysis.
Also, note that cash flow for financing trends could be identified and extrapolated to estimate the company's funding requirements in the future (also, look at – how to forecast financial statements?)
Investors used to look into the income statement and balance sheet for clues about the company's situation. However, over the years, investors have now also started looking at each of these statements alongside the conjunction of cash flow statements. This helps in getting the whole picture and also helps in taking a much more calculated investment decision. As we have seen throughout the article, we can see that cash flow from financing activities is a great indicator of the core financing activity of the company.
Suppose a company is consistently generating more cash than the cash used. If the company has surplus cash, it can be assumed that it operates in the so-called safe zone. In that case, it will come out in the form of dividend payments, share buybacks, reduction in debt, or case of acquisitions to grow the company inorganically. All of these are perceived as good points to create good stockholder value.
This has been a guide to Cash Flow from Financing Activities, formula, and its calculations. Here we also discuss cash flow from financing activities, examples of Apple, JPMorgan, and Amazon.