Cash Flow Statement – Cash Flows from Financing Activities

The final section of the statement of cash flows is “cash flows from financing activities.” This section includes any activities that involve the company’s owners or creditors, such as debt, dividends, and issuing or repurchasing shares.

Cash Flows from Financing Activities

Drawdown / Repayment of Borrowings

This item records issuing debt and the repayment of debt. When debt is issued, the firm receives cash that needs to be paid back at a later date. In between the repayment date and the issuance date, interest is paid. The repayment of debt issued represents a cash outflow. Here is a good illustration of how this item impacts financial statements.

Note that interest payments are not a financing activity. Rather, they are included in operating activities since these expenses are considered a part of normal business operations. However, interest expense is not broken out in the operating activities section of the cash flow statement since it is already calculated into net income.

Increase / Decrease in Common Stock

Newer companies and rapidly growing companies often need to issue lots of new stock to fund their growth. New stock issuance typically dilutes existing shareholders’ ownership – they own a smaller piece of the whole pie – but it also gives the company cash to expand. Here is a good illustration of how this item impacts financial statements. Raising capital by issuing additional shares is not necessarily a bad sign, as long as the company is expanding at an acceptable rate. Keep in mind, though, that selling additional shares means that less income is attributable to each shareholder.

Meanwhile, mature companies that have ample free cash flow often will buy back their own stock, which has the effect of increasing the value of existing shares – existing shareholders own a bigger piece of the pie. Share repurchases and dividend payments are typically the only two ways a company can enrich its shareholders with its cash flows. Here is a good illustration of how this item impacts financial statements.

Dividend Paid

Dividends are outflows of cash since cash is paid out to shareholders. Furthermore, the money spent on dividends should increase (become more negative on the cash flow statement) in subsequent periods. A decrease in dividends is often a sign that a company is experiencing difficulties, especially if the decrease is greater than the corresponding reduction in the number of shares outstanding. A company offering no dividends is not uncommon. Preferably, a company with no dividends should be experiencing significant growth.

Net Cash from Financing Activities

The net cash from financing activities figure is helpful when gauging its overall effect on the cash flows of the firm. However, it is more important to study the individual line items to see how the firm is raising cash or repaying cash.

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