What is Cash Flow From Financing Activities? (CFF) - Finmark (2024)

On the surface, the cash flow statement is a pretty straightforward financial report.

Cash comes in, cash goes out, and the cash flow statement describes where it came from and where it went.

Simple. Until you actually look at one, you see that the statement is split up into sections, each providing finance professionals with a little more insight into the health and profitability of a business.

That’s where things get a little more complicated and where a touch of accounting knowledge is going to come in handy.

One such section is the cash flow from the financing activities component, which is the topic of today’s lesson.

In this guide, we’re going to take a deep dive into cash flow from financing activities. We’ll look at what goes into this section of the cash flow statement, how to calculate it, and most importantly, how to analyze your own figures.

Note: If you’re new to cash flow statements, start here: How to Read a Cash Flow Statement

What Is Cash Flow From Financing Activities?

Cash flow from financing activities is the third section of an organization’s cash flow statement, outlining the inflows and outflows of cash used to fund the business for a given period.

For example, if you’ve taken on debt from a loan, issued new stocks, or paid out dividends, then these activities will show up in the cash flow from financing activities section.

This component of the cash flow statement helps investors understand a company’s financial strength and how well the organization’s capital structure is managed.

To understand why the cash flow from financing activities section is important, it’s helpful to take a step back and consider the cash flow statement as a whole.

Here’s what a cash flow statement looks like in Finmark from BILL to illustrate:

Note that while the principal purpose of the cash flow statement is to understand the net change in cash for the given period (typically monthly), we also want to know where the cash came from, and where it went.

That’s why we break the cash flow statement down into three sections.

First, we look at cash flow from operating activities, which describes how well a business generates cash from the main thing it does (whatever product or service it is you sell).

Then, we check out cash flow from investing activities, which includes things like the purchase and sale of capital equipment.

Lastly, we get to cash flow from financing activities, which, as discussed, describes cash movements related to financial activities like debt issuances and equity rounds.

The purpose of all of this is to provide more context to cash flow for the period.

Let me explain with an example (albeit a simplified one).

Let’s say you’re analyzing the cash flow statement for last month, and you have a positive cash flow of $45,000.

Sounds good, right?

But diving further into the three sections of the statement, it becomes clear that only $6,000 of that came from your day-to-day operating activities.

Another $4,000 came from the sale of capital equipment, and the final $35,000 was a cash injection from a bank loan (debt financing).

Now, you have a fuller picture, and you can make more informed decisions about the financial future of your business (such as not banking on the idea that you’re going to earn $45,000 in cash every month).

Cash flow from financing activities is also regularly used by potential investors to assess company health.

Let’s see how.

What Cash Flow From Financing Activities Tells You About Financial Health

If a company frequently turns to new debt or equity funding for cash, it might well be cash flow positive. But investors will typically take this as a sign that the company isn’t generating enough earnings from its core activities.

This is of particular concern if interest rates are expected to rise, as the cost of servicing those debts will increase in conjunction, which could land the business in hot water.

On the other hand, if a business is issuing dividends and repurchasing stock, but its earnings are underperforming, investors may take this as a warning sign too, as the company’s management could be attempting to prop up its stock price.

If, though, over the long term, the majority of a company’s cash flow comes from operating activities, this is a good sign that the business is financially healthy and able to turn its daily operations into cash effectively.

How To Calculate Cash Flow From Financing Activities

When calculating cash flow from financing activities, we need to know two things:

1. Cash inflows (from the issuing of equity or debt)
2. Cash outflows (from repurchasing of debt and equity or the paying out of dividends)

Then, we’re simply going to subtract the outflows from the inflows to calculate net cash flow from financing activities.

Let’s illustrate this with an example. Imagine that the following financing activities took place for our business last month:

• Equity financing received – $200,000
• Stock repurchases – ($20,000)
• Debt repayment – ($45,000)
• Dividend payments – ($5,000)

First, we add up all our cash inflows, which in this case is just the equity financing we received to the tune of $200,000.

Then, we add up all the outflows: $20,000 + $45,000 + $5,000 = $70,000.

Finally, subtracting the cash outflows from the inflows ($200,000 – $70,000), we get our net cash flow from financing activities for the month: $130,000.

What Is Included In The Cash Flow From Financing Activities Section?

The cash flow from financing activities section of the cash flow statement includes cash inflows and cash outflows for business activities related to the financing of the business.

Examples of cash inflows included in the cash flow from financing activities section are:

• Issuance of equity
• Issuance of debt

Examples of cash outflow included in the cash flow from financing activities section are:

• Repayment of equity
• Repayment of debt
• Payment of dividends
• Capital or finance lease payments

Positive vs. Negative Cash Flow From Financing Activities

The net cash flow from financing activities section can be either positive or negative, just like cash flow as a whole can be positive or negative.

Neither is necessarily desirable or undesirable in a vacuum. It all depends on the company’s particular circ*mstances.

If cash flow is positive, that means the business has engaged in more new debt or equity financing activities that bring cash in than it engaged in debt repayments.

This is a great thing for cash on hand, as it may allow the business to expand, or stay alive during early-stage product development.

It does mean, however, that the company had to take on debt or issue equity to stay cash-flow positive, which is a sign that its operating activities might not be particularly effective.

On the other hand, a net negative cash flow from financing activities might demonstrate that the business is servicing debt (and therefore has debt).

But it can also be a positive thing, as the organization might be cash flow positive from operating activities, and thus be using this new profitability to pay down existing debt or make dividend payments to investors.

Keep On Top Of Cash Flow From Financing Activities

Understanding how to calculate cash flow from financing activities is only the first step,

The real value comes from diving into the details and analyzing these figures in the context of the wider picture, and creating strategies for continuous improvement of your company’s financial position.

Save yourself the needless hours laboring over financial statement creation, and spend your time where it’s needed: financial analysis.

Get yourself set up with Finmark, the financial modeling and planning platform for startups and SMBs that helps you create cash flow statements quickly and efficiently.

Try Finmark today with a free 30-day trial.