Financial Explainer — financing cash flow

As the saying goes, cash is king. Specifically, how companies convert profits into cash. It's vital that business owners understand the accounting mechanics behind this, especially if they want to raise funding from investors or lenders.

This is why we've designed a collection of dedicated blogs that explain the components of financial statements in a way that makes it easy for non-financial business managers to understand.

Getting to grips with the basics will hopefully help those readers who want to stay on top of their numbers as their company grows.

This instalment covers the third and final section of a cash flow statement — cash flow from financing activities.

Cash flow from financing activities is the money a company receives or spends to fund its operations or growth, usually through debt or equity.

Here are the main components:

• Proceeds from issuing shares

  • What it means: This is money your company raises by selling new shares to investors.

  • Why it's included here: Because it's money that comes into your business from financing, not from selling products or services.

  • Effect: Increases cash.

• Repurchase of shares (often called buybacks)

  • What it means: This is when your company buys back its own shares from those who hold them.

  • Why it's included here: It's a means of using cash to reduce the number of shares in circulation.

  • Effect: Decreases cash.

• Proceeds from issuing debt (e.g. loans or bonds)

  • What it means: This is when your company borrows money, e.g. from a bank or by issuing bonds (which are only really relevant for large companies).

  • Why it's included here: It's a way to raise cash for expansion or operations.

  • Effect: Increases cash

• Repayment of debt

  • What it means: This is when your company makes repayments of its loans or bonds.

  • Why it's included here: It shows that your company is using cash to reduce its liabilities.

  • Effect: Decreases cash

• Dividends paid to shareholders

  • What it means: This is when your company shares some of its profits with its shareholders.

  • Why it's included here: It's a financing-related outflow (a return to shareholders).

  • Effect: Decreases cash

Here's what your resulting cash flow from financing (CFF) tells you:

• Positive CFF

  • Your company is raising cash, e.g. by issuing shares or borrowing.

  • This could mean that your company is growing and/or it needs cash.

Negative CFF

• Your company is paying off debt, buying back shares or paying dividends.

  • This could mean that you're returning value to shareholders or reducing your liabilities.

You now have the three main components of your cash flow statement which will show whether there has been a net increase or decrease in their positions:

• Operating cash flow (OCF)

• Investing cash flow (ICF)

• Financing cash flow (CFF)

Adding these together will give you your net change in cash.

Your cash flow statement will then show:

• Cash at the start of the period (or your opening cash flow).

• Your net change in cash (which you've just calculated).

• The resulting cash at the end of the period (by adding together the two items above).

So now you'll know how much cash moved in and out of your company and how much is left in your bank account.