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.

Related 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.

Related
cash-bundles

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.

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

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

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
Taxes: Everything you need to know about how and when to file
female accountant working.

There are two things inevitable in life: death and taxes. For business owners like yourself, taxes are certainly unavoidable. Your profits, revenue, and expenses all impact your operations and business future.
But taxes for small businesses vary in complexity based on many things. You'll find where and how you run your business significantly affect your tax filing season. Who you employ and how you pay them also impact tax reporting.
Of course, your industry impacts your reporting, too. You may gain access to extra tax credits and expense write-offs. Filing taxes on your own may be the best option (or not). Discover everything you need to know about how and when to file taxes for your business.

How to do taxes for your small business
How you file depends on how you pay yourself from your business earnings. If your business is unincorporated or you don't treat yourself as an employee through your business, you'll have to pay out self-employment tax. This is based on the net income or profit from your business. Again, if you pay yourself as an employee through your business, you won't have to pay self-employment taxes.
Filing on your own
If you are filing on your own, you likely will pay self-employment taxes. You'll need your business net income multiplied by the self-employment tax rate (15.3%) to determine your tax liability. This covers what normal businesses pay into Social Security and Medicare benefits from employee taxes.

Read more
How much does it cost to start a roofing business?
Man working on steep roof

If the thought of having your own roofing business intrigues you, do you have any notion of how to build it For instance, how much does it cost to start a roofing company? Knowing the answer to that question can go a long way in deciding if such a company is right for you.

Nailing that cost down to the exact dollar can be difficult due to each individual situation being different. Are you inheriting the business from family? If not, expect startup costs to go into the thousands of dollars. This is to cover a wide range of expenses early on.

Read more
How to create a funding-request business plan
financial projections profit loss chart person writing on chart next to a laptop

If you're ready to launch a new business, you have to know how to ask for funding. Even the most entrepreneurial spirits understand the value of planning, especially when it comes to convincing investors and banks. There are many kinds of business plans, but some have a special section dedicated to funding requests.
For more detailed funding requests, you're convincing investors and banks your business is worthwhile. Seeking out sources of external financing requires extra work. With nearly three-fourths of new businesses funded by business loans, credit cards, and lines of credit, you need to know how to ask for funding.
Read on and discover everything you need to include for your funding request business plan. By the end of this guide, you'll have every important funding detail covered to win investors over.

What to include in your funding request business plan
Lengthy business plans include many things. Some plans are shorter and more of an overview, while other plans are more detailed. For funding requests, you'll need to deep dive into each section of your outline, with an emphasis on financial details.

Read more