Cash Flow from Financing Activities

What is Cash Flow from Financing Activities?

Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity, payment of dividends, issuance and repayment of debt, 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 statement.

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-k. 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 lease obligations
• Outflow: principal repayments of finance lease obligations

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 (YoY) basis since a lot of money was spent on investing activities 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) to be as low as possible. Whatever 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 recapitalization)
• Pay dividends or buy back shares

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) model, it has significant long-term debt, and that debt is repaid as quickly as possible each year.

Image: CFI’s LBO Financial Modeling Course.

Items impacting this company’s funding are the line of credit (also called a revolver), 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 credit.

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 & Valuation Analyst (FMVA)® designation, 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 Items
• Income Statement Items
• Operating Cash Flow
• Cash Flow from Investing Activities