9 min read. October 26, 2022 by Lauren Coppolone
Are you looking to dig deeper into your business and find out exactly how your cash flow statement works? Well, you’re in the right place. Here’s our comprehensive guide on Cash Flow From Financing Activities (CFF) - what it is, how it works, and what are some of the most important things you need to know in 2022:
Successful businesses track everything that goes into and comes out of their operations. One way that entrepreneurs will do this is through their cash flow statement—a living document that follows the cash coming into and leaving your business.
There are a few different components to this statement, with each being equally as important as the last, but it’s essential for any entrepreneur to familiarize themselves with the entirety of their cash flow statements to ensure they’re not spending more than they’re earning.
Cash flow statements are broken down into 3 categories:
Operating activities involve the cash you generate from operating your business, investing activities are the money you earn from investment opportunities, and financing activities cover the debt, equity, and dividend transactions your company makes.
Operating and investing activities are typically the easiest to understand, whereas financing activities are a bit more complicated.
The three categories work in tandem to offer a complete view of your business’s financial health, making it a key resource for any entrepreneur looking to go the distance.
If you’re unfamiliar with how your cash flow statement works, you can potentially run into an issue where you’re struggling to pay off your expenses, or you’ve overextended the capability of your organization and are under heavy financial pressure.
If you’re looking to get a better grasp on your cash flow, don’t worry: We’ve got you covered. Read on for more information on cash flow statements, including Cash Flow From Financing Activities, operating activities, and investing activities.
Cash flow from financing activities describes the incoming and outgoing capital that a business raises and repays, whether through debt financing, equity financing, or dividend payments.
Basically, it’s the money you receive from securing financing for your business and the money you’ve spent to pay off that expense, minus any dividends you paid out to shareholders.
It sounds complicated, but it gets easier once you know the cash flow from financing activities formula:
CFF = CED - (D + RP)
CFF = Cash flow from financing
CED = Cash from securing equity or debt financing
D = Dividends
RP = Repurchased debt and equity
Let’s break this down: Your Cash Flow From Financing Activities balance will equal the capital you’ve secured through capital markets minus your dividends plus what you’ve repaid on your financing.
This formula will allow you to see the progress you’ve made on your repayment over a set period of time.
If the result is a positive number, this means that your business has increased its cash reserves and, therefore, expanded its overall assets. A negative balance indicates that you’ve paid out more capital than you’ve secured. For example, a negative balance can result from issuing dividends to shareholders or paying off long-term debt.
Any business that has a financing relationship should also evaluate its Cash Flow From Financing Activities (CFF) on a consistent basis to make sure they’re in a good financial position. By doing so, you can stay on top of your borrowing and notice problems before they go too far.
Some of the most common examples of financing activities for CFF (Cash Flow From Financing Activities) include treasury stock, business loans, new stocks or dividends.
Financing activities will differ depending on your type of business, but here are a few of the most common financing activities found on cash flow statements:
Small businesses won’t have stock or dividend transactions on their cash flow statement, so they’re mostly concerned with securing and repaying business loans they’ve secured.
However, this component of your cash flow statement is important for any business, even one that isn’t publicly traded.
You need to have a solid understanding of your cash flow to make educated decisions in your business moving forward.
If you don’t, you might make a move that isn’t financially viable for your company at that time, potentially creating a very restricting scenario and limiting what your organization can achieve.
Cash flow statements include three key components: cash flow from investing activities, cash flow from operating activities, and cash flow from financing activities.
Your cash flow from operating activities is the cash you generate from providing your product or service minus the amount you’ve paid for expenses and other business expenditures.
Essentially, it’s the money you make minus the money you’ve spent over a given time period.
The total amount will be either positive or negative depending on how your business performed within the time frame you’re evaluating, with positive balances showing that you earned more than you spent.
If your total is negative, you’re paying more in expenses than you are generating, which is a red flag of uneven business performance.
This section includes the cash you generate from the purchase and sale of long-term assets, such as equipment, real estate, and facilities.
If you’re selling more than you’re buying, the total amount of your cash flow from investing activities will be positive, showing that you’re bringing in more cash than you’re investing.
A negative result doesn’t necessarily mean that your business is in jeopardy; It simply means that you’re investing more than you’re selling.
However, it’s still important to monitor these numbers to ensure you’re able to respond to an unforeseen challenge or afford a growth opportunity.
As stated above, cash flow from financing activities describes the money your business generates from financing activities and how much you’ve repaid.
It includes equity financing, debt financing, and dividend payments you’ve given to shareholders. When you’re looking to calculate this component of your cash flow statement, you’ll take the amount of capital you’ve secured through financing over a period of time and subtract the amount you’ve repaid.
The total amount will stand as your cash flow, with a positive value displaying that your business gained more in assets than it lost through repayment.
Cash flow is difficult to manage at any stage of business. It requires you to take yourself out of the day-to-day and focus on the finer details, which might not be what you want to do at the end of a long day.
However, regardless of how tedious of a task it is, consistently monitoring your cash flow is one of the best ways to keep your business on a path toward success.
Financing activities are important because they can help you see exactly how much you still owe on a business loan. Essentially, they are a running total of your outstanding loans and how much you’ve repaid.
While you might be able to keep track of your payments in your head, monitoring your cash flow from financing activities is an easy way to see what's left of your business loan. It’s also a great resource for entrepreneurs who take out more than one business at a time.
Tracking your financing activities is just as important to investors and lenders as it is to you. When you apply for a business loan, the lender you’re dealing with performs a comprehensive evaluation of your business to determine the level of risk associated with financing your operation.
They’ll review your financial information, including your cash flow, credit history, and revenue reports, to see if your business is capable of paying back the borrowed amount within the term.
Expect all three components of your cash flow statements to be heavily scrutinized during this process. The lender will evaluate your operating, investment, and financing activities to understand your business’s revenue sources and financial health.
If your cash flow is positive and you’re earning more than you’re spending, you have a good chance of reaching an approval.
The difference between debt and equity financing is the way you acquire capital for your business. Debt financing involves taking out a conventional loan, while equity financing involves securing capital in exchange for business ownership.
Debt financing is much like the name suggests—you’re taking on financial debt in exchange for capital for your business. You’ll repay the borrowed amount over the length of the term and, if you make timely payments and don’t default, come out on the other side with no debt attached to your name.
Debt financing comes in a variety of forms, including term loans, business advances, equipment financing, and much more. You can secure a debt financing option through banks, credit unions, online lenders, and FinTech marketplaces, like National Business Capital.
Equity financing, on the other hand, involves transferring a portion of the equity in your business to an investor to raise capital. Think of it like the popular TV show Shark Tank, where the investors offer funding to business owners in exchange for a percentage stake in their company.
Most entrepreneurs try to avoid this option because they want to maintain equity in their business, but if you’re finding it difficult to secure other methods of financing, it might be worth considering.
However, there’s almost always a way around equity financing, especially in our modern world. Debt financing has become more accessible with the emergence of online lenders and FinTech marketplaces, which has allowed more entrepreneurs to secure the funds they need to grow without sacrificing ownership.
There are options for startups, those with bad credit histories, and other situations where you'd typically have trouble reaching an approval; You just need to be savvy enough to find the right lender for your specific circumstances.
The most common debt financing options include term loans, business lines of credit, equipment financing, business advance, and SBA loans, among others.
Entrepreneurs commonly leverage debt financing options to secure the resources they need to tackle challenges and grow. There are various different forms of debt financing, such as:
Term loans are a one-time lump sum payment that you must repay within the term outlined by your lender. You’ll pay interest on top of the borrowed amount, and you may need to offer an asset as collateral to “secure” the financing.
A business line of credit is a credit line that you can draw from whenever you need cash for a business expense. Once you pay off the amount you’ve borrowed, you can draw from the same funds again, allowing you to stay one step ahead of the latest challenge.
If you’re looking to break down a sizeable equipment purchase into more manageable monthly payments, you can’t go wrong with equipment financing. This financing option allows you to afford the expensive equipment you need when you need it, but you’ll have to pay an interest rate on top of the equipment’s price as well.
A business advance is essentially a loan for your future sales. Lenders will review your financial information to determine how much revenue your business will generate in the future, then offer you funding based on that amount. You’ll have to pay a portion of your future sales to the lender, however, as they’ll charge a fee for providing the service.
Lastly, we have SBA loans—some of the most coveted financing options available to entrepreneurs.
SBA loans come in many shapes and sizes, but all of them are provided through the Small Business Administration and SBA-sponsored lenders. You can secure up to $5 million through their 7(a) and 504 programs. You can leverage their microloan program for smaller amounts, which features borrowing amounts of up to $50,000 and flexible terms.
The list above isn’t exhaustive when it comes to Cash Flow From Financing Activities, and there are many more financing options you can leverage as you grow your business and reach your full potential.
But, despite the many options, finding the right lender for your specific circumstances will still require you to put time and effort into your search. You’ll need to send out applications, wait for the responses of each, and discern which avenue would work best for your specific needs, which can be a lengthy process.
If you’d rather skip the line and streamline your search for financing, look no further than National Business Capital, the leading FinTech marketplace.
We’re a time-saving machine for business owners, complete with an award-winning team behind every deal. Our expert Business Finance Advisors take the time to learn about you, your business, and the challenges you’re facing to find the RIGHT lender for your business within our 75+ lender marketplace.
We’re in the business of helping you get back to business; Speak with our team today and see how National can help you set your plans into motion.
Cash flow statements are essential to the survival of your business, and Cash Flow From Financing Activities can be a good way to give a boost to your business.
Every entrepreneur should familiarize themselves with their cash flow from investing activities, cash flow from operating activities, and cash flow from financing activities to ensure that their business is in a good financial position to continue serving customers at the pace they expect.
It’s difficult to learn about it, but once you do, you’ll have a much better grasp on the strength of your business and, more importantly, the opportunity to fix cash flow problems before they start causing an issue.
While your cash flow from operating and investing activities is often easier to determine, that doesn’t mean you should neglect the third component, especially if your business is actively involved in financing your growth.
Most successful businesses have secured financing at one point or another to streamline their growth, and you can follow suit if you feel that you’re ready to take your business to the next level.
Once you do, you can give the experienced Business Finance Advisors of National Business Capital a call, and they’ll connect you with the right lender for your specific circumstances using our 75+ lender marketplace.
Speed, simplicity, and professionalism—just a few things you can expect from National’s award-winning team. With over $2 billion secured through 25,000+ transactions since 2007, we’re uniquely capable of helping you secure the funds you need to grow your business.
Complete our digital application today, and take the first steps toward your full potential!
Cash flow from financing activities is a section of your cash flow statement that accounts for the inflows and outflows of capital related to your company’s financing transactions. This can include debt financing, equity financing, and issuing dividends, with the final balance at the end of your billing cycle showing the financial health of your business.
A positive cash flow indicates that more cash is coming into your business than leaving, whereas a negative balance shows the opposite.
Negative cash flow from financing can put a strain on your resources and require you to seek additional sources of funding. A negative balance isn't always an indication of financial trouble; Some companies intentionally operate with negative cash flow from financing activities to invest in their future growth.
Regardless of your cash flow goals, it’s important to monitor your financial transactions to ensure you’re able to make informed decisions that benefit your organization as a whole.
The simple answer is—it depends. Your cash flow statement serves as a measurement of your business’s financial health, with the cash flow from financing activities section including actions like issuing bonds, taking out loans, and repaying debt.
Positive cash flow from financing activities means that you have more capital entering your business than leaving. On the other hand, a negative balance means the opposite, but this isn’t necessarily a bad thing.
Some companies will maintain negative cash flow from financing balances to invest in their future, but for most, it’s a good idea to keep this number in the green.
A negative balance could prevent you from qualifying for certain financial services, like additional financing, which can potentially put the brakes on your growth and development.
Interest payments are usually considered a financing activity because they are cash flows that go towards financing a company's activities. Dividends, taking on additional loans, and paying off said loans all go into the cash flow from financing activities section of your cash flow statement.
Regardless of the type of financing used, interest paid is considered a cash outflow for financing activities. As such, it should be included in the calculation of cash flow from financing activities.
The cash flow statement is one of the three financial statements that businesses use to track and report their financial performance. It lists all of the cash that has come into and out of the business over a period of time, allowing the business owner to easily take a snapshot of their organization’s financial health.
One of the categories on the cash flow statement is cash flow from financing activities, which includes all cash that has been used to repay loans. Loan repayment can have a major impact on a business's cash flow, so it is important to carefully track and report this information.
Dividends generally fall into the cash flow from financing activities category of your cash flow statement, but are dividends received considered a financing activity?
It depends on how the dividend was paid out. If they were paid in cash, then you would consider that activity a “cash inflow, which is part of your financing activities. Dividends paid out in stock aren’t included in this section of your cash flow statement because there’s technically no cash going into or out of your business during that transaction.
National Business Capital helps entrepreneurs secure quick and fair financing to save time and cultivate sustainable growth.
Our stress-free online platform is designed for simplicity and speed, helping business owners go from application to approval in a matter of hours. And while we remain a leader in the Fintech industry, our clients agree it’s our personalized service and award-winning team that sets us apart.
From SBA loans to lines of credit, to equipment financing, and more, business owners can access all the different financing programs available to them in one place. Through our streamlined process, we have helped clients secure $2 billion in financing since 2007, and, more importantly, we’ve helped entrepreneurs save a tremendous amount of time and grow faster.
Lauren is the Marketing Manager at Nationalbusinesscapital.com. She has 7 years of professional experience with a focus on small business marketing and finance. She previously worked as a senior business analyst for B2B SaaS, Sky IT Group. She has covered topics including, business financing, startups, retail, taxes & regulations, etc. Her work has been featured by USA Today, Google & Yahoo News. Lauren holds a B.A. from the Fashion Institute of Technology’s (FIT) School of Business.