Do you know that there are three different classes of cash flow activities? One of them is the cash flow from financing activities. These activities are the cash inflow and outflow arising from the company’s financing activities. Some examples of such activities include a change in capital that arise from the issuance of securities and debentures. These activities also include the payment of short-term or long-term liabilities (Also see Can You Differentiate Debt and Liability?), interests on securities, as well as payment of dividends.
When the accountants from an accounting firm in Johor Bahru is preparing the cash flow statement, they will place the cash flow from financing activities as the last of the three types of cash flow activities (Also see Types of Cash Flow Activities – Cash Flow from Investing Activities). These activities include cash inflows generated by the activities for the company to obtain funds, as well as the cash outflows generated when the company is paying for such funds.
The financing activities that cause cash inflows include the increase in short-term and long-term borrowings, as well as the sale of the company’s shares. On the other hand, cash outflow can be caused by a drop in the short-term loans that the company has obtained, or when the company is paying for its long-term borrowings. If the company pays cash dividends to its shareholders or it buys back its shares, then there will be an outflow of cash arising from financing activities.
If a company always have positive cash flow, we may assume that the business is operating (Also see Types of Cash Flow Activities – Cash Flow from Operating Activities) in a safe zone. When the cash that the company has generated is more than that of it has spent, the excess will result in the payments of dividends, a decrease in the company’s liabilities, the repurchase of stocks, and so on. People will consider these as good signs that help in creating good shareholder value.
In the early days, people used to focus on the company’s balance sheet and profit and loss statement when they want to assess the company’s situation. However, as time passes by, they started studying both the statement with the company’s statement of cash flow. In fact, this helps them to get a clear picture of the financials (Also see What is a Financial Statement Review?) of the business before they make any decisions. This can be proved by the points that we have discussed above, that is, by looking at the statement of cash flow, we will be able to know the company’s main financing activities in the section of cash flow from financing activities.
In short, cash flows from financing activities are the cash flows that arise from the repurchase and issuance of the stocks and bonds of the company as well as dividend payment. These transactions are related to the company’s capital, and they will appear in the company’s balance sheet under the section of long-term capital.