Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period used to finance its business. Finance activities include the issuance and repayment of equityEquityIn finance and accounting, equity is the value attributable to a business. Book value of equity is the difference between assets and liabilities, payment of dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend., issuance and repayment of debt,Long Term DebtLong Term Debt (LTD) is any amount of outstanding debt a company holds that has a maturity of 12 months or longer. It is classified as a non-current liability on the company’s balance sheet. The time to maturity for LTD can range anywhere from 12 months to 30+ years and the types of debt can include bonds, mortgages and capital lease obligations. Companies that require capital will raise money by issuing debt or equity, and this will be reflected in the cash flow statementCash Flow StatementA Cash Flow Statement (officially called the Statement of Cash Flows) contains information on how much cash a company has generated and used during a given period. It contains 3 sections: cash from operations, cash from investing and cash from financing..
What’s Included in Cash Flow from Financing Activities?
It’s important for accountants, financial analysts, and investors to understand what makes up this section of the cash flow statement and what financing activities include. Since this is the section of the statement of cash flows that indicates how a company funds its operations, it generally includes changes in all accounts related to debt and equity.
Financing activities include:
Issuance of equity
Repayment of equity
Payment of dividends
Issuance of debt
Repayment of debt
Capital/finance lease payments
Example of Cash Flow from Financing Activities
Below is an example from Amazon’s 2017 annual report and form 10-k10-KForm 10-K is a detailed annual report that is required to be submitted to the U.S. Securities and Exchange Commission (SEC). The filing provides a comprehensive summary of a company’s performance for the year. It is more detailed than the annual report that is sent to shareholders. In the bottom area of the statement, you will see the cash inflow and outflow related to financing.
Activities in financing are:
Inflow: proceeds from issuing long-term debt
Outflow: repayment of long-term debt
Outflow: principal repayments of capital leaseCapital Lease vs Operating LeaseThe difference between a capital lease vs operating lease - A capital lease (or finance lease) is treated like an asset on a company’s balance sheet, while an operating lease is an expense that remains off balance sheet. Think of a capital lease as more like owning a property and think of an operating lease as more like renting a property. obligations
Outflow: principal repayments of finance lease obligations
Source: amazon.com
As you can see above, Amazon had a net outflow of cash in two of the three years, and most of it was related to capital lease obligations. In 2017, there was a large inflow of cash related to issuing long-term debt. This debt was most likely required to keep the total cash balance steady on a year-over-year (YoYYoY (Year over Year)YoY stands for Year over Year and is a type of financial analysis used for comparing time series data. Useful for measuring growth, detecting trends) basis since a lot of money was spent on investing activitiesCash Flow from Investing ActivitiesCash Flow from Investing Activities is the section of a company's cash flow statement that displays how much money has been used in (or generated from) making investments during a specific time period. Investing activities include purchases of long-term assets, acquisitions of businesses, and investments in marketable securities in 2017.
Capital Structure of a Business
Companies typically use a combination of debt and equity to fund their business and try to optimize their Weighted Average Cost of Capital (WACC)WACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt. The WACC formula is = (E/V x Re) + ((D/V x Rd) x (1-T)). This guide will provide an overview of what it is, why its used, how to calculate it, and also provides a downloadable WACC calculator to be as low as possible. Whatever capital structureCapital StructureCapital structure refers to the amount of debt and/or equity employed by a firm to fund its operations and finance its assets. A firm's capital structure a company thinks is appropriate, the impact of the financing decisions will flow through the cash flow statement.
Examples of financing decisions include:
Fund the business entirely with equity
Fund the business with a combination of debt and equity
Recapitalize the business and change its capital structure (see leveraged recapitalizationLeveraged RecapitalizationA leveraged recapitalization occurs when an issuer turns to the debt markets to sell bonds and uses the proceeds to buyback equity.)
Pay dividends or buy back sharesDividend vs Share Buyback/RepurchaseShareholders invest in publicly traded companies for capital appreciation and income. There are two main ways in which a company returns profits to its shareholders – Cash Dividends and Share Buybacks. The reasons behind the strategic decision on dividend vs share buyback differ from company to company
Applications in Financial Modeling
When building a financial model in Excel, it’s important to know how the cash flow from financing activities links to the balance sheet and makes the model work properly. As you can see in the screenshot below, the financing section is impacted by several line items in the model. Since this example is from a Leveraged Buyout (LBO) modelLBO ModelAn LBO model is built in Excel to evaluate a leveraged buyout (LBO) transaction, the acquisition of a company funded using a significant amount of debt., it has significant long-term debt, and that debt is repaid as quickly as possible each year.
Items impacting this company’s funding are the line of credit (also called a revolverRevolver DebtRevolver debt is a form of credit that differs from installment loans. In revolver debt, the borrower has constant credit access up to the maximum), debt, equity, and dividends. The only line items that are impacted in the forecast (2018 to 2024) are the repayment of debt and the drawing down on the line of creditRevolving Credit FacilityThis guide to a Revolving Credit Facility outlines how revolving credit works, and how to incorporate one in financial modeling in Excel. It has an established maximum amount, where the business has access to the funds when needed. This type of credit is mostly used for operating purposes and cash flow fluctuations.
Additional Resources
Hopefully, this has been a helpful guide to understanding how to account for a company’s funding activities. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ designationFMVA® CertificationJoin 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari , which can transform anyone into a world-class financial analyst.
To continue learning and progressing your career, these additional CFI resources will be helpful:
Balance Sheet ItemsBalance SheetThe balance sheet is one of the three fundamental financial statements. These statements are key to both financial modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are financed, through either debt or equity. Assets = Liabilities + Equity
Income Statement ItemsIncome StatementThe Income Statement is one of a company's core financial statements that shows their profit and loss over a period of time. The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.This statement is one of three statements used in both corporate finance (including financial modeling) and accounting.
Operating Cash FlowOperating Cash FlowOperating Cash Flow (OCF) is the amount of cash generated by the regular operating activities of a business in a specific time period. The operating cash flow formula is net income (form the bottom of the income statement), plus any non-cash items, plus adjustments for changes in working capital
Cash Flow from Investing ActivitiesCash Flow from Investing ActivitiesCash Flow from Investing Activities is the section of a company's cash flow statement that displays how much money has been used in (or generated from) making investments during a specific time period. Investing activities include purchases of long-term assets, acquisitions of businesses, and investments in marketable securities
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