Cash flow from financing activities is a crucial section of the cash flow statement, detailing the inflows and outflows of cash related to funding the business through debt, equity, and other financial instruments. This section provides insight into how a company raises capital and how it repays its obligations. Here, we present three diverse and practical examples of cash flow from financing activities calculations.
When a company needs to raise funds for expansion, it may choose to issue common stock. This increases equity and provides cash for operational or capital expenditures.
The company, XYZ Corp, decides to issue 10,000 shares of common stock at $15 per share. The goal is to raise funds for a new product line.
The cash flow from this financing activity will be calculated as follows:
Thus, the cash flow from financing activities for this issuance is $150,000.
Issuing common stock increases the equity of the company but may dilute existing shareholders’ ownership percentage. Companies must weigh the pros and cons before proceeding with equity financing.
A company may require immediate liquidity to cover operational costs or to invest in new opportunities. In this case, taking out a bank loan is a common financing activity.
Consider ABC Inc., which takes a bank loan of $200,000 with an interest rate of 5% per annum for a term of 5 years. The company uses this loan to acquire new equipment.
The cash flow from financing activities in this instance is primarily the receipt of cash from the loan:
The cash flow from financing activities for ABC Inc. from this bank loan is $200,000.
While the loan provides immediate cash flow, companies must consider the repayment schedule and interest expenses, which will affect future cash flows.
Once a company has taken on debt, it will need to manage repayments effectively. Repaying long-term debt is an important cash outflow in financing activities.
Let’s examine DEF Ltd., which repaid $50,000 of its long-term debt this financial year. This repayment is crucial for maintaining a healthy balance sheet and creditworthiness.
The cash flow from financing activities for this repayment can be calculated as follows:
Thus, the cash flow from financing activities for DEF Ltd. due to debt repayment is -$50,000.
Repayment of debt reduces liabilities on the balance sheet but also signifies a cash outflow, which must be planned for in the company’s overall cash flow management strategy.