Cash Flow From Financing Activities

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What is 'Cash Flow From Financing Activities'

Cash flow from financing (CFF) activities is a category in a company’s cash flow statement that accounts for external activities that allow a firm to raise capital. In addition to raising capital, financing activities also include repaying investors, 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'

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 being the balance sheet and income statement. The cash flow statement measures the cash generated or used by a company during a given period. The cash flow statement has three sections - cash flow from operating (CFO), cash flow from investing (CFI), and cash flow from financing activities (CFF). Cash flow from operating activities indicates the amount of cash that a company brings in from its regular business activities or operations. Cash flow from investing activities reflect a company's purchases and sales of capital assets.

Cash flow from financing activities measures the movement of cash between a firm and its owners and creditors. It indicates the means by 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 either 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. 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.

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.

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, 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 included:

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)
Dividends paid (6,216)
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)