What is Cash Flow from Financing Activities?
Cash flow from financing activities (CFF) is a part of a companies cash flow statement. It shows the flows of cash that are used to finance the company.
Examples of financing activities include dividends and transactions involving equity and debt.
Why is Cash Flow from Financing Activities Important?
Cash Flow from Financing Activities gives investors an idea into a company’s financial strength. For example of the a large part of the net outflow is for dividends then that would be seen as a positive.
If their was a large inflow of cash from borrowing debt, then as an investor you will need to know why they need the cash. Are they not generating enough cash from operating activities, or are they planning an expansion of the business that they believe will make the company even more profitable in the next ten years?
Formula for CFF
Calculating CFF is pretty simple.
CFF = CED – CD – RP
- CED = Cash inflow from issuing equity or debt
- CD = Cash paid out as dividends
- RP = Repurchase of debt or equity
Lets look at an example, here is the summary of their Cash From Financing Activities statement:
- Issued debt of $5,000,000 (inflow)
- Payments on long term debt $400,000 (outflow)
- Payments of dividends $600,000 (outflow)
- Issue of equity $1,000,000 (inflow)
Using this we would calculate our CFF as:
- $5,000,000 + $1,000,000 – $400,000 – $600,000 = $5,000,000 inflow.
As an investor you would be interested to know why the company needed to raise $5,000,000 in debt and $1,000,000 in equity. Is cash from operating activities an issue or does the board of directors have grand plans for expansion?
Accounting Standards of CFF – IFRS vs GAAP
Inernational companies using IFRS (International Financial Reporting Standards) and USA based companies using GAAP (Generally Accepted Accounting Principles) can have some distinctions on where they put certain cash flow items. IFRS offers some flexibility to the companies on where they want to show these items on the cash flow statement.
|Dividends paid by company to shareholders||Cash flow from Financing OR Operations||Cash flow from Financing|
|Interest received and paid by or to a company||Cash flow from Financing OR Operations||Cash flow from Financing|
|Dividends received by a company from its investments||Cash flow from Financing OR Operations||Cash flow from Financing|