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Cash Flow from Financing Activities

Understand the Cash Flow from Financing Activities Section of the CFS

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Cash Flow from Financing Activities

In This Article
  • What is the definition of cash flow from financing activities?
  • What are the steps to calculating the cash flow from financing activities section?
  • Which specific line items appear in the cash from financing section?
  • Should interest expense be accounted for in the cash flow from financing section?

Cash Flow from Financing Section

The cash flow statement, which tracks the net change in cash during a specific period, is split into three sections:

  1. Cash Flow from Operating Activities (CFO): Net income from the income statement is adjusted for non-cash expenses and changes in net working capital (NWC).
  2. Cash Flow from Investing Activities (CFI): The cash impact from the purchase of non-current assets, namely PP&E (i.e. CapEx).
  3. Cash Flow from Financing Activities (CFF): The net cash impact of raising capital from equity/debt issuances, net of cash used for share buybacks, and debt repayments — with the outflow from the payout of dividends to shareholders also taken into account.

Cash Flow from Financing Line Items

Cash from Financing Definition
Debt Issuances Raising external financing by borrowing funds from lenders, with the obligation to pay interest throughout the holding period and the full principal at the end of the lending term
Equity Issuances Raising external financing by issuing shares (i.e. pieces of ownership) in exchange to equity investors in the market, who become partial owners post-investment
Share Buybacks Repurchasing shares that were previously issued and trading in the open market to reduce the total number of shares in circulation (and the net dilution)
Debt Repayment As part of the loan agreement, the borrower must repay the full debt principal (i.e. the original amount) on the date of maturity
Dividends Issuing recurring or one-time cash payments to equity shareholders as a form of compensation (i.e. the return of capital)

Interest Expense and Cash from Financing

One common misconception is that interest expense — since it is related to debt financing — appears in the cash from financing section.

However, interest expense is already accounted for on the income statement and affects net income, the starting line item of the cash flow statement.

Cash Flow from Financing Activities Formula

The formula for calculating the cash from financing section is as follows:

Cash from Financing = Debt Issuances + Equity Issuances + (Share Buybacks) + (Debt Repayment) + (Dividends)

Note that the parentheses signify that the item is an outflow of cash (i.e. a negative number).

By contrast, debt and equity issuances are shown as positive inflows of cash, since the company is raising capital (i.e. cash proceeds).

  • Debt Issuances → Cash Inflow
  • Equity Issuance → Cash Inflow
  • Share Buybacks → Cash Outflow
  • Debt Repayment → Cash Outflow
  • Dividends → Cash Outflow

Cash Flow from Financing — CFS Final Step

To wrap up, the cash flow from financing is the third and final section of the cash flow statement.

The cash from financing amount is added to the prior two sections — the cash from operating activities and the cash from investing activities — to arrive at the “Net Change in Cash” line item.

The net change in cash for the period is added to the beginning cash balance to calculate the ending cash balance, which flows in as the cash & cash equivalents line item on the balance sheet.

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