Cash Flow From Financing Activities

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DEFINITION of 'Cash Flow From Financing Activities'

A category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital and repay investors, such as issuing cash dividends, adding or changing loans or issuing more stock. Cash flow from financing activities shows investors the company’s financial strength. A company that frequently turns to new debt or equity for cash, for example, could have problems if the capital markets become less liquid.

The formula for cash flow from financing activities is as follows:

Cash Received from Issuing Stock or Debt - Cash Paid as Dividends and Re-Acquisition of Debt/Stock

BREAKING DOWN '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. Negative 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 one of the three main sections of a company’s cash flow statement, the other two being cash flow from operations and cash flow from investing. This section of the cash flow statement measures the movement of cash between a firm and its owners and creditors.

Financing activities that generate positive cash flow include receiving cash from issuing stock and receiving cash from issuing bonds. Financing activities that generate negative cash flow include spending cash to repurchase previously issued stock, to pay down debt, to pay interest on debt and to pay dividends to shareholders.

Companies report cash flow from financing activities in their annual 10-K reports to shareholders. For example, a company might state that it repurchased 1 million shares at an average cost of $10 per share, that it paid out $5 million in shareholder dividends, that it used $2 million to pay off an older, higher-interest bond and that it received $2 million from issuing a new, lower-interest bond.

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