You might have a profitable business with a high valuation, popular product line, upward-trending quarterly revenue, and a promising financial outlook for the second half of the year. But do you have a good handle on how much cash is coming in and going out?
Businesses that succeed in the long term have a clear understanding of their cash flow any given week and enough in reserves to fund their operations and cover new costs. They have full visibility into invoice commitments, inventory, installment payments, and upcoming business expenses. These businesses are more attractive to investors, shareholders, and savvy customers.
Now that we know why cash flow management is important, here’s how to calculate your cash flow from transactional financing activities related to debt, equity, and dividends. Basically, these activities involve issuance and repayment of equity, issuance and repayment of debt, payment of dividends, and capital and lease payments.
Cash flow from financing (CFF) activity refers to net cash flow that funds company operations. It includes equity, debt, and dividends, and shows investors the overall financial health of your business. CFF demonstrates exactly how cash flows between the company and its investors, owners, and creditors. These numbers show the issuance and repurchase of a company’s bonds and stocks, dividends payments, and capital structure transactions.
Here’s how you can figure your business’s CFF. Subtract cash paid out as dividends (CD) and debt or equity repurchase (RP) from incoming equity and debt funds (CED):
CFF = CED – (CD + RP)
Or, put more simply: Net cash flow = cash receipts – cash payments
In a nutshell, you are subtracting cash outflow from cash inflow to see your available cash from financing activities during a particular time frame. You may break that total down further into three categories, looking at cash flows from operating activities, investing activities, and financing activities.
CFF is one snapshot of company finances. Balance sheets and income statements illustrate a business’s financial picture in other ways. Cash flow financing activities can fluctuate month to month, so it’s really important to keep a running tally of individual factors in the calculation and run totals at least monthly.
Inflowing cash can come from long-term debt proceeds. Outflowing cash can be long-term debt repayment and principal repayments of capital and finance lease obligations.
Cash flow financing is not always a net positive for the company. There is positive CFF and negative CFF. Positive cash flow from financing activities means more money is coming in than going out. It can include stock that’s sold to investors, debt that’s borrowed from a creditor or bank, and bonds purchased by investors.
With negative cash flow from financing, more money is going out than coming into the company. Examples include debt payment, dividends, and stock repurchases. “Negative” doesn’t always mean bad–investors and financial analysts may favorably view stock repurchase or dividend payments. They also review the business’s overall debt profile and transactional patterns alongside positive and negative cash flow. This includes issuance and repayment of debt and equity for capital raising.
CFF activities include other transactions such as preference shares, securities redemptions, interest on securities, share sales, share repurchases, and the increase or decrease in short- and long-term borrowings.
Each company’s CFF should be carefully analyzed alongside the balance sheet and income statement, and in the context of the time of year, industry performance, and financial trends. All incoming and outgoing cash-based activities should be seen holistically, with an assessment of the different types of debt, how each type of transaction is behaving, and the overall trajectory up or down.
CFF activities should also be analyzed over time–quarterly and yearly, with monthly reviews of how the numbers are trending, and dissemination of reports to company departments that participate in those finance activities. Ongoing analysis of CFF is essential so business divisions can change course if needed, buy or sell financial products, or postpone new capital investments.
But in general, when incoming cash outweighs the total cash going out, you can figure that the company’s finances are on solid footing at that point in time and that it has enough cash in reserves to make investments, purchase more equipment, or make its own investments.
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