Cash flows from financing activities
Cash flows from financing activities is a line item in the statement of cash flows. This statement is one of the documents comprising a company’s financial statements. The line item contains the sum total of the changes that a company experienced during a designated reporting period that were caused by transactions with owners or lenders to either:
- Provide long-term funds to the company; or
- To return those funds to the owners or lenders.
If the company is a not-for-profit, then you would also include in this line item all contributions from donors where the funds are to be used only for long-term purposes.
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Items that may be included in the financing activities line item are:
- Sale of stock (positive cash flow)
- Repurchase of company stock (negative cash flow)
- Issuance of debt, such as bonds (positive cash flow)
- Repayment of debt (negative cash flow)
- Payment of dividends (negative cash flow)
- Donor contributions restricted to long-term use (positive cash flow)
The cash flows from financing activities line item is one of the more important items on the statement of cash flows, for it can represent a substantial source or use of cash that significantly offsets any positive or negative amounts of cash flow generated from operations.
On the other hand, a smaller organization that has no debt and pays no dividends may find that it has no financing activities in a reporting period, and so does not need to include this line item in its statement of cash flows.
You should delve into the reasons for a large positive or negative balance in the cash flows from financing activities, since it can, for example, denote the need for a large loan to support ongoing negative cash flows from operations. Thus, large amounts in this line item can be considered a trigger for a more detailed investigation.
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