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)
CED = Cash in flows from issuing equity or debt
CD = Cash paid as dividends
RP = Repurchase of debt and equity
As an example, let's say a company has the following information in the financing activities section of its cash flow statement:
Thus, CFF would be as follows:
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:
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
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
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 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.
|Cash flows from Financing Activities:||(in USD millions)|
|Net change in short-term borrowings||(1,673)|
|Proceeds from issuance of long-term debt||137|
|Payments of long-term debt||(2,055)|
|Purchase of company stock||(8,298)|
|Dividends paid to noncontrolling interest||(479)|
|Purchase of noncontrolling interest||(90)|
|Other financing activities||(255)|
|Net cash used in financing activities||(18,929)|
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.