The proper management of your company’s financial health involves the regular monitoring of three major financial indicators, and these are the balance sheet, income statement, and cash flow statement. This helps in knowing the company’s financial performance, managerial skills, and scalability and is therefore required for the investor, the management, the shareholders, and the analyst to make a well-informed decision.
A cash flow statement provides substantial information on the company’s financial health and comprises three important sections:
In this blog, we take a deep dive into understanding the cash flow from financing activities with some real-life examples and how advanced cash management software enables us to optimize cash flow.
Cash flow from financing activities (CFF) gives a picture of how a company raises and spends money through the intermediates of issuing stocks, borrowing, debt repayment, and paying dividends. A vital component of the cash flow statement it helps assess a company’s financial stability and growth tactics.
CFF provides insights into a company’s financial strength and how well a company’s capital structure is managed.
The cash flow statement is a pivotal financial statement that provides a comprehensive overview of a company’s cash inflows and outflows during a specified period. It is a key indicator of a company’s liquidity and cash positions and provides valuable insights into a company’s operational efficiency and financial health. The cash flow statement consists of three sections:
CFF depicts how a firm raises money to ensure seamless operation or to scale up. Organizations raise funds either through debt or equity. If an organization plans to borrow money, they do so by securing loans as well as by selling bonds. In both cases, they have to pay interest to their creditors as well as bondholders.
When a company opts for an equity route, it issues stocks to investors, who now become shareholders. A cost associated with equity is dividend payments, which companies might opt to pay their shareholders.
Aspect
Debt
Equity
No ownership transfer
Fixed interest payments
No fixed obligation
No dilution of control
Potential dilution of control
Interest payments are tax-deductible
No tax-deductible payments
The cash flow from financing activities formula is the sum of all cash inflows and outflows. This includes stock repurchases, dividend payments, debt issuance, and debt repayment. In this formula, cash outflows are negative numbers and are represented within parentheses.
Cash Flow from Financing = Debt Issuances + Equity Issuances + (Share Buybacks) + (Debt Repayment) + (Dividends)
In the CFF formula, debt and equity issuances are shown as positive cash inflows since the business is raising capital (i.e., cash proceeds). In contrast, share buybacks, debt repayments, and dividends are represented within parentheses to signify that the item is a cash outflow.
Cash from investing activities denotes utilizing the cash for long-term activities involving the purchase or sale of fixed assets, business acquisitions, and mergers, and investing in marketable securities. It showcases the amount of cash a company has raised or spent via investments in a particular period.
Any moderation in the cash position of a company that involves fixed assets, investments in securities, mergers, and acquisitions would be accounted for under cash from investing activities.
For example, if a business owner invests in a new factory building to expand its operations, that purchase would be considered a cash outflow from investing activities. Similarly, if he/she sells some old machinery the company no longer needs, the cash received from the sale would be a cash inflow from investing activities.
While there is no universal formula to calculate cash flow from investing activities, the formula that is generally accepted across the globe is:
Cash flow from investing activities= CapEx/purchase of non-current assets + marketable securities + business acquisitions – divestitures (sale of investments).
Companies disclose cash flow from financing activities in their annual financial reports to shareholders. For instance, in the fiscal year 2023, Peloton (the fitness tech giant) reported a net cash flow of -$305.4 million, with cash flow from financing activities amounting to $76.8 million. The components of its cash flow form financing activities are listed in the table below.
Here, we can see CFF for Peloton for 2023 involves more cash inflows related to proceeds from employee stock purchases and exercise of stock option. The cash outflow involved repayment of term loan and finance leases. As cash inflow exceeded cash outflow the CFF was positive for Peloton in 2023.
Effective cash flow management encompasses more than a simple deduction from the inflow and outflow calculations. Developing efficient cash management is critical to growing healthy cash flow for any business. These approaches not only fortify the business during adversity but also improve cash visibility.
With HighRadius Cash Management Software, you can boost cash flow by eliminating manual processes, enhancing productivity, and reducing errors while keeping a tab on cash positions in real time. Additionally, you get:
The impact? You experience
To calculate dividends paid in cash flow statements, subtract the net change in retained earnings from the annual net income. This formula reflects the portion of profits distributed to shareholders after accounting for changes in retained earnings, representing dividends paid out during the period.
Dividends paid are typically categorized under financing activities in the cash flow statement. This section outlines the cash flows related to the company’s financing activities, including dividends distributed to shareholders as a return on their investment in the business.
Yes, paying dividends is considered a financing activity. It involves the distribution of a company’s earnings to shareholders as a return on their investment in the company, which falls under the category of financing activities in the cash flow statement.
Cash outflows can be included in financial activities such as repayment of loans, where the company returns borrowed funds with interest to creditors, stock buybacks, where shares that the company buys from investors, and dividend payments where an organization pays its shareholders.
Some examples of cash inflows from financing activities are stock issuance, borrowings, and other financing arrangements. For example, company revenue may be achieved through issuing bonds, obtaining loans from banks or receiving cash in exchange for equity participation in the company.
Positive cash flow from financing activities indicates a net increase in cash resulting from financing activities, such as raising capital or obtaining loans. Negative CFF indicates a net decrease in cash due to financing activities, like repaying debt or buying back shares.
