Importance of Cash Flow from Financing Activities

Cash Flow from Financing Activities is a section in the cash flow statement, which gives the total net flow of cash required to fund the company.

 Features or Characteristics of Cash Flow from Financing Activities    

  • It includes the cash inflows from the issue of shares, debentures, loans.
  • It also includes the cash outflows from the repayment of loans/amount borrowed, Dividends paid to the shareholders, interest paid for the debt, repurchase of shares.
  • It gives investors how much cash inflows and outflows are from financing and not from the business operations.

Allocations/Implications/Applications of Cash Flow from Financing Activities

Cash flow from financing activities is of great importance in the cash flow statement as it represents a company’s financial health. It can also give an idea of plans for the company. A company with a significant positive inflow might be focusing on expanding lines, while a company with large outflows might be repaying its debts.

How to Calculate Cash Flow from Financing Activities

The following steps are involved in calculations of Cash Flow from Financing Activities.

  • We need to find the following from the cash flow statement of the company.
  • Issuance and buyback of equity shares.
  • Issuing and repayment debts, bonds, notes, etc
  • Dividends paid to shareholders.
  • Interest paid for the debt.
  • Add all the cash inflows.
  • Add all the cash outflows.

Subtract cash inflows (CI) from outflows (CF) to find the Cash Flow from Financing Activities of the company; Cash Flow from Financing Activities = CI – CF

Significance of  Cash Flow from Financing

  • It means that a company is growing and focusing on expanding.
  • Potential of Increasing the assets of the company
  • A company that takes a large number of debts may show a positive CFF.
  • Large debts mean that the company is not performing well in its operations and not generating profits.

Significance of a Negative Cash Flow from Financing

  • It might mean that the company is repaying debts.
  • Negative CFF can also indicate that the company is performing well, so it is repurchasing its shares/debts.
  • It can mean the company is servicing debt.
  • It can mean that the company pays high interest on its debts.
  • It may mean that the company is repurchasing debts to ensure investors are happy but not performing well.

Conclusion of Cash Flow from Financing Activities

It can be concluded that a sizeable significant change in the Cash Flow from Financing Activities of a company is not a good sign and is not a characteristic of a good company. These changes should prompt the investors to look deep into the accounts and find out how it performs in its regular operations and the profits made by the company.