What Is Cash Flow From Financing Activities?
Cash flow from financing activities (CFF) is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.
Cash flow from financing activities provides investors with insight into a company’s financial strength and how well a company's capital structure is managed.
Formula and Calculation for CFF
Investors and analyst will use the following formula and calculation to determine if a business is on sound financial footing.
CFF=CED−(CD+RP)where:CED=CashinflowsfromissuingequityordebtCD=CashpaidasdividendsRP=Repurchaseofdebtandequity
- Add cash inflows from the issuing of debt or equity.
- Add all cash outflows from stock repurchases, dividend payments, and repayment of debt.
- Subtract the cash outflows from the inflows to arrive at the cash flow from financing activities for the period.
As an example, let's say a company has the following information in the financing activities section of its cash flow statement:
- Repurchase stock: $1,000,000 (cash outflow)
- Proceeds from long-term debt: $3,000,000 (cash inflow)
- Payments to long-term debt: $500,000 (cash outflow)
- Payments of dividends: $400,000 (cash outflow)
Thus, CFF would be as follows:
- $3,000,000 - ($1,000,000 + $500,000 + $400,000), or $1,100,000
Key Takeaways
- Cash flow from financing activities is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company.
- Financing activities include transactions involving debt, equity, and dividends.
- Debt and equity financing are reflected in the cash flow from financing section, which varies with the different capital structures, dividend policies, or debt terms that companies may have.
Cash Flow in the Financial Statement
The cash flow statement is one of the three main financial statements that show the state of a company's financial health. The other two important statements are the balance sheet and income statement. The balance sheet shows the assets and liabilities as well as shareholder equity at a particular date. Also known as the profit and loss statement, the income statement focuses on business income and expenses. The cash flow statement measures the cash generated or used by a company during a given period. The cash flow statement has three sections:
- Cash flow from operating (CFO) indicates the amount of cash that a company brings in from its regular business activities or operations. This section includes accounts receivable, accounts payable, amortization, depreciation, and other items.
- Cash flow from investing (CFI) reflects a company's purchases and sales of capital assets. CFI reports the aggregate change in the business cash position as a result of profits and losses from investments in items like plant and equipment. These items are considered long-term investments in the business.
- Cash flow from financing activities (CFF) measures the movement of cash between a firm and its owners, investors, and creditors. This report shows the net flow of funds used to run the company including debt, equity, and dividends.
Investors can also get information about CFF activities from the balance sheet’s equity and long-term debt sections and possibly the footnotes.
Capital From Debt or Equity
CFF indicates the means through which a company raises cash to maintain or grow its operations. A company's source of capital can be from either debt or equity. When a company takes on debt, it typically does so by issuing bonds or taking a loan from the bank. Either way, it must make interest payments to its bondholders and creditors to compensate them for loaning their money.
When a company goes through the equity route, it issues stock to investors who purchase the stock for a share in the company. Some companies make dividend payments to shareholders, which represents a cost of equity for the firm.
Positive and Negative CFF
Debt and equity financing are reflected in the cash flow from financing section, which varies with the different capital structures, dividend policies, or debt terms that companies may have.
Transactions That Cause Positive Cash Flow From Financing Activities
- Issuing equity or stock, which is sold to investors
- Borrowing debt from a creditor or bank
- Issuing bonds, which is debt that investors purchase
A positive number for cash flow from financing activities means more money is flowing into the company than flowing out, which increases the company’s assets.
Transactions That Cause Negative Cash Flow From Financing Activities
- Stock repurchases
- Dividends
- Paying down debt
Negative CFF numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see.
Investor Warnings From CFF
A company that frequently turns to new debt or equity for cash might show positive cash flow from financing activities. However, it might be a sign that the company is not generating enough earnings. Also, as interest rates rise, debt servicing costs rise as well. It is important that investors dig deeper into the numbers because a positive cash flow might not be a good thing for a company already saddled with a large amount of debt.
Conversely, if a company is repurchasing stock and issuing dividends while the company's earnings are underperforming, it may be a warning sign. The company's management might be attempting to prop up its stock price, keeping investors happy, but their actions may not be in the long-term best interest of the company.
Any significant changes in cash flow from financing activities should prompt investors to investigate the transactions. When analyzing a company's cash flow statement, it is important to consider each of the various sections that contribute to the overall change in its cash position.
Real-World Example
Companies report cash flow from financing activities in their annual 10-K reports to shareholders. For example, for the fiscal year ended Jan. 31, 2022, Walmart's cash flow from financing activities resulted in a net cash flow of -$22.83 billion. The components of its financing activities for the year are listed in the table below.
| Cash flows from Financing Activities: | (in USD millions) |
| Net change in short-term borrowings | 193 |
| Proceeds from issuance of long-term debt | 6,945 |
| Repayments of long-term debt | (13,010) |
| Premiums paid to extinguish debt | (2,317) |
| Dividends paid | (6,152) |
| Purchase of Company stock | (9,787) |
| Dividends paid to noncontrolling interest | (424) |
| Sale of subsidiary stock | 3,239 |
| Other financing activities | (1,515) |
| Net cash used in financing activities | (22,828) |
We can see that the majority of Walmart's cash outflows were due to repayments of long-term debt of $13.010 billion, the purchase of company stock for $9.787 billion, and dividends paid for $6.152 billion. Although the net cash flow total is negative for the period, the transactions would be viewed as positive by investors and the market.
Article Sources
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United States Securities and Exchange Commission. "Walmart Form 10-K, FY 2022," Page 57.
