Skip to main content
  1. Home
  2. Starting a business

How to calculate cash flow from financing

Jennifer Lindahl
By

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.

Recommended Videos

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-bundles
Image used with permission by copyright holder

How to calculate cash flow from financing

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.

Related

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.

Two women calculating business funds
Image used with permission by copyright holder

Transaction examples

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.

Man at desk writing In accounting notebook
Image used with permission by copyright holder

Maintain perspective

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.

Editors' Recommendations

Topics
Jennifer Lindahl
Jennifer Lindahl
Former Digital Trends Contributor
Jennifer Lindahl is an experienced writer and editor with two decades of experience in journalism, public policy, and B2B…
How much does it cost to start a coffee food truck?
Customer drinking coffee by a food truck

Have you ever thought of owning a food truck or coffee shop? Did you consider that a food truck coffee business might be the best combination of both? Operating a mobile coffee shop introduces the cost of starting a food truck and removes the operational and startup costs of restaurant leasing or ownership.
Of course, there are startup costs for food trucks, but these differ based on many factors. What you sell, where you sell, and how you sell all impact the cost of starting a coffee food truck. If you're worried about profitability and whether it's worth investing in your mobile coffee business, read this guide to understand these costs.

Are coffee food trucks profitable?
First things first, coffee food trucks are profitable. Any business has the potential to be profitable if planned and operated properly. In fact, over 50% of food truck owners report at least $150,000 in revenue per year. Coffee truck owners can expect similar revenues with full-time operation and building local recognition.

Read more
How to determine food costs when pricing a new menu
A couple reading menus together

Whether you're starting a new restaurant, revamping your entire menu, or simply introducing a new dish, it's essential to have a good handle on the overall cost to prepare and sell that dish. The restaurant industry has infamously tight margins, and it's vulnerable to fluctuations in the economy, the seasons, consumer tastes, and changing food prices.

For these reasons, and to maximize potential revenue coming into your restaurant, you should carefully monitor and control menu and food pricing. Here are some useful tips for managing food costs when developing and implementing a restaurant menu.
Direct and indirect costs
One of the first steps is to have full awareness of the base cost of each ingredient in a particular dish and across the entire menu. Be sure to calculate the amounts and weights of each ingredient that you plan to use in each dish. It's also important to estimate how many portions you expect to serve over time — by day, by week, by month, and so on.

Read more
How to choose a catchy name for your restaurant business
restaurant business name blank store signage sign design mockup isolated clear shop template

When starting your restaurant, the name of your restaurant is an essential aspect of its brand. Branding is crucial in all businesses, but the name of your restaurant is how your local community and patrons of your business remember you the most. If you think about your favorite restaurants that come to mind, of course, their name is the first thing that will pop into your head. 

People prefer a catchy name of a restaurant business, but also one that is memorable and personalized to them. If you want to set your new restaurant up for better success, you will give it a catchy name. Therefore, let's explore some restaurant name ideas to help you pick a catchy and unique name for your new restaurant that will set you up for success.

Read more