What is cash flow from financing activities (CFF)?
– Cash flow from financing activities (CFF) is the section of a company’s cash flow statement that records the cash a business receives from and pays to providers of capital — mainly lenders and owners. It shows cash raised by issuing debt or equity and cash used to repay debt, repurchase shares, or distribute dividends.
Why it matters (short)
– CFF reveals how a company is funding itself and how it returns capital to investors. It complements the other two sections of the cash flow statement: cash flow from operating activities (cash generated by core business operations) and cash flow from investing activities (cash used to buy or sell long‑term assets).
Key definition
– Cash flow statement: a financial report that tracks cash inflows and outflows over a period, split into operating, investing, and financing activities.
– Inflows: cash received (e.g., loan proceeds, issuance of stock).
– Outflows: cash paid (e.g., debt repayments, dividends, share repurchases).
Formula and how to calculate CFF
– Basic formula:
CFF = Total cash inflows from financing activities − Total cash outflows from financing activities
– Typical inflow items:
– Proceeds from issuing debt (bank loans, bonds).
– Proceeds from issuing equity (new common or preferred stock).
– Typical outflow items:
– Repayments of debt principal.
– Share repurchases (buybacks).
– Dividends paid to shareholders.
– Payments of debt issuance costs (in some presentations).
Step-by-step: how to get CFF from the financial statements
1. Open the company’s cash flow statement and find the “Cash flows from financing activities” section. (If a company uses disclosures, check notes for large one‑off items.)
2. List all financing-related cash receipts and payments.
3. Sum the inflows, sum the outflows, then subtract outflows from inflows.
4. Cross-check with changes in balance-sheet financing accounts (long-term debt, short-term borrowings, common stock, treasury stock, retained
earnings.) Use changes in those balance-sheet accounts to verify large items and to detect omitted or misclassified cash flows.
Adjustments and special cases
– Non-cash financing activities: Some financing events don’t involve cash immediately (e.g., conversion of debt to equity, stock issued for an acquisition). These are disclosed in the notes but excluded from CFF; record them separately when analyzing sources and uses of capital.
– Debt issuance costs: Often shown as a reduction to debt or amortized through interest expense; some companies report the cash paid as a financing outflow—check presentation and footnotes.
– Deferred financing and accrued dividends: Accrued but unpaid items may change balance-sheet accounts without cash movement in the period; match them to cash flows in the following period.
– Classification differences by accounting standards: US GAAP and IFRS differ for some items (for example, interest and dividends may be classified differently). Always check which standard the company uses.
Worked numeric example — direct reading from cash flow statement
Assume a company’s cash flow statement shows:
– Proceeds from issuing long-term debt: +$500 million
– Proceeds from issuing common stock: +$200 million
– Repayments of debt principal: −$300 million
– Share repurchases (treasury stock purchases): −$100 million
– Dividends paid: −$50 million
Net cash flow from financing activities (CFF) = (500 + 200) − (300 + 100 + 50) = 700 − 450 = +$250 million.
Interpretation: Positive CFF (+$250m) means the company raised more cash from financing than it paid out this period. That could fund investment or operating deficits, or increase leverage.
Worked numeric example — reconstructing CFF from balance-sheet changes
Starting balances and movements (all $ millions):
– Beginning long-term debt: 800; ending: 1,000 → increase +200
– Beginning short-term borrowings: 50; ending: 20 → decrease −30
– Common stock (par value and paid-in capital): beginning 300; ending 500 → increase +200 (indicates stock issuance)
– Treasury stock: beginning −100; ending −150 → change −50 (additional repurchases)
– Net income for period: +120
– Beginning retained earnings: 600; ending: 660 → increase +60
Reconstructing CFF uses financing-account changes plus dividends (which we must infer). Note retained earnings change = net income − dividends + other adjustments. Here, retained earnings rose by
60. Therefore dividends = net income − increase in retained earnings = 120 − 60 = 60 (cash outflow).
Now map each financing account change to a cash flow, remembering brief definitions: retained earnings = accumulated net income less dividends and other adjustments; treasury stock = company shares repurchased and held by the company (a negative equity account; an increase in treasury stock balance implies repurchases/cash outflow).
Worked reconstruction (all $ millions)
– Proceeds from long‑term debt issuance: beginning 800 → ending 1,000 = +200 (cash inflow)
– Repayment of short‑term borrowings: beginning 50 → ending 20 = −30 (cash outflow)
– Proceeds from common stock issuance (par + paid‑in capital): beginning 300 → ending 500 = +200 (cash inflow)
– Treasury stock repurchases: beginning −100 → ending −150 = −50 (cash outflow)
– Dividends paid (inferred): −60 (cash outflow)
Sum: CFF = +200 − 30 + 200 − 50 − 60 = +260 (net cash inflow from financing activities = $260 million).
Checks and assumptions
– Check: If you have the statement of cash flows, the “cash flows from financing activities” line should equal this reconstructed number (subject to rounding and noncash items).
– Assumptions made: all changes in equity accounts (common stock, paid‑in capital) represent cash transactions; there are no noncash financing transactions (for example, debt converted to equity or stock issued for services). If such noncash items exist, they must be excluded from CFF and disclosed elsewhere.
– Common pitfalls: forgetting treasury stock is recorded as a negative equity balance (more negative = more repurchases), failing to infer dividends from retained earnings and net income, or missing separately disclosed financing fees and capital leases.
Quick checklist to reconstruct CFF from balance sheet and income data
1. List changes in borrowing accounts (long‑term and short‑term): increases = cash inflows, decreases = repayments (outflows).
2. List changes in equity accounts attributable to financing (common stock, paid‑in capital): increases = issuances/inflows; decreases = retirements/outflows.
3. Translate treasury stock movement into repurchases (outflows if treasury rises in magnitude).
4. Infer dividends: dividends = net income − (change in retained earnings) + adjustments (if any).
5. Exclude noncash financing transactions; add any separately disclosed financing cash items (debt issuance costs, etc.).
6. Sum inflows and outflows to get net CFF.
Educational disclaimer
This example is for educational purposes and not individualized investment or accounting advice. Verify transactions and disclosures in the company’s actual financial statements and notes for precise reporting.
Sources
– Investopedia — Cash Flow From Financing (CFF): https://www.investopedia.com/terms/c/cashflowfromfinancing.asp
– U.S. Securities and Exchange Commission — Beginner’s Guide to Financial Statements (Statement of Cash Flows): https://www.sec.gov/investor/pubs/b