Merchants may often find themselves short on cash flow, particularly in the early stages of their business. Fortunately, financing activities exist to ensure your company can continue to grow.
A 2019 study (The State of Small Business Cash Flow) by Intuit Quickbooks and Wakefield Research showed that 61% of merchants struggle with cash flow. The most significant impact on their company's finances comes from the time it takes to process payments after receiving them from customers, clients, vendors, or banks - which averages 29 days.
Small businesses must have a basic understanding of this concept because it's linked to how much money we have available to run our businesses.
And this guide will break down just that from what cash flow from financing activities (CFF) is, examples, types, to how it impacts your business.
So whether you're a business owner looking for better ways to manage your finances or just getting started in eCommerce, you've come to the right place.
Let's dive into it right now.
Table of contents
- What is cash flow from financing activities?
- Types of cash flows
- What activities are included in the CFF activities?
- How do you calculate cash flow from financing activities?
- Real-world cash flow from financing activities example
- The importance of your cash flow from financing activities
- How to increase cash flow from financing activities
- Conclusion
What is cash flow from financing activities?
Cash flow from financing activities measures how much cash is coming into a company from things like issuing new equity, taking out loans, or repaying existing debt. It's one of the three main categories of cash flow, along with cash flow from operations and cash flow from investing activities found on a company's cash flow statement.
A company's overall cash flow is the sum of all three.
Types of cash flows
Operating, investing, and financing. Each one is important in its own way to determine which business areas are driving substantial cash movements.
Operating cash flow. It refers to the funds that flow in and out of the business from day-to-day operations, such as sales, expenses, and invoicing.
Investing cash flow. This is about the company's capital used to purchase assets or invest in new business ventures.
Financing cash flow. The money that flows in and out of the business from sources of financing, such as loans, equity investments, or debt repayments.
You - and pretty much anyone - can find all these three in the cash flow statement within the financial section of your annual, quarterly, or monthly account report.
What activities are included in the CFF activities?
Cash flow from financing activities involves all the cash that comes in and goes out relating to a company's long-term debt, equity financing, and dividend payments.
This cash can come from a variety of sources, including:
Loans
Downside investments
And even initial public offerings
In terms of outflows, cash flow from financing activities typically goes towards:
Repaying debt
Dividend payments to shareholders
Or buying back shares
These activities result in a change in the company's cash balance, providing a comprehensive picture of the health status on the financial side of things.
How do you calculate cash flow from financing activities?
It's time to go through the step-by-step CFF calculation and do it like a pro. Actually, once you know the formula, it's a piece of cake! But before we jump into that in a minute, there are three variable concepts you should be familiar with:
Debt. It isn't just something we owe to other people. It can also be loans that businesses take out for various purposes, from financing equipment to growth initiatives. Borrowing money is a way that companies bring in the capital they need to purchase new items or support a project.
Equity. This is how much you've paid off (and own) compared to how much you still owe. So, say you own a store worth £200K, and you owe £140K - your equity is £60K. However, on the cash flow statement, equity refers more to the portion of the business that belongs to the owners and/or investors.
Dividends. A dividend is the distribution of profits by a company (a payment) to those who've invested in it (shareholders). Dividend payments can be made in either cash or additional shares of stock, and the dividend amount is determined by the company's board of directors or owner(s) as appropriate.
In order to calculate cash flow from financing activities, you'll need to consider all cash coming in from issuing debt or equity, as well as all cash going out from dividend payments and from buying back debt or equity.
To get started, create a list of all financing activities that have taken place over a certain period of time. Once you have this list, add up all of the cash inflow items and subtract all the cash outflows. This will reveal the total cash flow from financing activities for the period in question.
What if we try the formula together? Let's go.
Cash flow from financing activities formula
Keep in mind that this number can be either a positive cash flow or negative cash flow, depending on whether more cash is coming in or going out. Cash flow from financing activities (CFF) is a key number to keep track of, as it can give you AND potential investors insight into how good or not-so-good your company's financial health is.
CFF = CED - (CD + RP)
CED means cash inflows from equity or debt.
CD means cash paid as dividends.
RP means repurchase of debt or equity.
For example, imagine an eCommerce you've been working on has the following numbers:
Repurchase stock: £1.3M (cash outflow)
Payments to long-term debt: £700K (cash outflow)
Proceeds from long-term debt: £4.5M (cash inflow)
Payments of dividends: £500K (cash outflow)
The executed CFF formula would look like this:
First, £4.5M - (£1.3M + £700K + £500K)
Then, £4.5M - £2.5M
Lastly, £2M ← this is your hypothetical result
Worried about your company's cash flow? A lot of merchants go through the same and have no idea how to calculate it. That's why the Bloom team made a guide to calculating cash flow to lead you through the process: how to track your cash inflow and outflow, identify potential sources of financial trouble, and make sound decisions about how to best use your resources. Once you know your cash flow, you can start making moves to optimise it over time.
Real-world cash flow from financing activities example
The BBC reported a net cash flow of £170M for its Annual Report and Accounts for 2020/2021. This is the result of several different financing activities that happened during that period of time. All those cash flow items are outlined in the table below:
As any savvy investor knows, cash flow is one of the most important indicators of a business. As seen in this BBC case, a negative cash flow isn't necessarily a cause for alarm. In fact, some of the largest cash outflows - repayments of borrowings of £205M and payment of obligations under leases of £161M - can be viewed as positive signs for investors and the market. By repaying its debts, BBC demonstrates its ability to meet its financial obligations.
The importance of your cash flow from financing activities
Financing activities are essential to keep an eye on because they can give insight into a business's future growth prospects. If a company is consistently issuing new debt, it might be indicative of financial troubles down the road.
Check out this article: Your complete guide to cash flow forecasting.
On the other hand, if a company regularly repays loans, it might be in a stronger financial position. Thus, CFF may be helpful for investors when considering whether to inject money into businesses like yours. That's because this type of cash flow lets them get an idea of a company's short-term liquidity and ability to service its long-term debt obligations.
How to increase cash flow from financing activities
For a company to have positive cash flow from financing activities and therefore increase it, more money must flow into the business than out.
Here are three options to do so:
Issue company stock or equity - which is then sold to shareholders.
Borrow debt from a bank or creditor.
Issue bonds - debt that investors buy.
Of course, each path has nuances, and before taking any action, you should consider which of the common flow problems you have.
Conclusion
Cash flow from financing activities is the net increase or decrease in cash and cash equivalents resulting from sources of finance, such as issuing debt or equity, borrowing, repaying loans, etc. The main cash flow types are: operating, investing, and financing activities.
To calculate cash flow from financing activities, you need to know the beginning balance of cash and equivalents plus any inflows (such as new loans) and minus any outflows (such as loan or debt repayment). Remember that CFF can be a positive or negative number, depending on whether your company is bringing in more money than it's paying out.
Now that you know all there is to know about cash flow from financing activities, put it into practice and see how it can help your business grow.
