Cash Flow From Financing Activities

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.

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.

$\text{CFF}=\text{Cash in flows from issuing Equity or Debt}-\left(\text{Cash Paid as Dividends + RePurchase of Debt and Equity}\right)$CFF=Cash in flows from issuing Equity or Debt−(Cash Paid as Dividends + RePurchase of Debt and Equity)

1. Add cash inflows from issuing debt or equity.
2. Add all cash outflows from stock repurchases, dividend payments, and repayment of debt.
3. Subtract the cash outflows from the inflows to arrive at the cash flow from financing activities for the period.

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 being the balance sheet and income statement. 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), cash flow from investing (CFI), and cash flow from financing activities (CFF). Cash flow from operating activities indicates the amount of cash that a company brings in from its regular business activities or operations. Cash flow from investing activities reflects a company's purchases and sales of capital assets.

Cash flow from financing activities measures the movement of cash between a firm and its owners, investors, and creditors. It indicates the means by 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 either 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. 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

Transactions That Cause Negative Cash Flow From Financing Activities

• Stock repurchases
• Dividends
• Paying down debt

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. 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. Investors can also get information about cash flow from financing activities from the balance sheet’s equity and long-term debt sections and possibly the footnotes.

• 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.

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 $1,900,000

Companies report cash flow from financing activities in their annual 10-K reports to shareholders. For example, for the fiscal year ended January 31, 2017, Walmart's cash flow from financing activities resulted in a net cash flow of -$18,929. The components of its financing activities for the year are listed in the table below.

We can see that the majority of Walmart's cash outflows were due to the purchase of company stock for $8.298 billion, dividends paid for $6.216 billion, and payments of long-term debt of $2.055 billion. Although the net cash flow total is negative for the period, the transactions would be viewed as positive by investors and the market.

Cash flow from investing activities reports the aggregate change in a company's cash position resulting from investment gains or losses and changes resulting from amounts spent on investments in capital assets, such as plant and equipment. The investing section of the cash flow statement shows capital expenditures, which are considered long-term investments in the company. Cash flow from financing activities shows the net flows of cash that are used to fund the company, which include transactions involving debt, equity, and dividends.

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's 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.