Financing Activities: Definition and Example

Financing activities are financial transactions where a company interacts with its owners (through issuing or repurchasing equity) and its creditors (through borrowing or repaying loans). These activities involve the flow of cash and cash equivalents between the company and its sources of finance, such as investors and creditors, for non-trading liabilities like long-term loans and bonds payable. 

Key Takeaways

• Financing activities show how a company raises and manages capital with owners (stock) and creditors (loans).
• These activities, such as issuing stock or repaying debt, are key to a company’s financial health.
• The cash flow from financing activities, part of the cash flow statement, tracks cash coming in or going out for these activities.
• Positive cash flow means cash inflow (e.g., from issuing bonds), while negative cash flow means cash outflow (e.g., paying dividends).
• Understanding these activities helps assess a business’s financial stability and growth plans.

Table of Contents

• What Are Financing Activities in the Cash Flow Statement?
• What Goes Under Financing Activities?
• What Are Some Examples of Financing Activities?
• Simplify Your Financing Activities with FreshBooks

What Are Financing Activities in the Cash Flow Statement?

The cash flow from financing activities represents the funds a business takes in or pays out to finance its activities. It’s one of the three sections on a company’s statement of cash flows, with the other two being operating and investing activities. The activities include issuing and selling stock, paying cash dividends, and adding loans. These activities directly impact a company’s capital structure and are a key indicator of its financial health.

A positive number on the cash flow statement indicates that the business has received cash. This boosts its asset levels. On the other hand, a negative figure indicates the business has paid out capital such as making a dividend payment to shareholders or paying off long-term debt.

What Goes Under Financing Activities?

The source of capital for a business can either be from equity or debt. When business takes on debt, it does so by taking a loan from the bank or issuing a bond. It makes interest payments to the creditors and the bondholders for loaning their money.

If the business takes the equity route, it issues stock to investors who purchase it for a share in the company. These activities are used to support operations and strategic activities of a business.

Long-Term Liabilities

An example of financing activities involving long-term liabilities (noncurrent liabilities) is the issuance or redemption of debt, such as bonds. A positive amount signifies an improvement in the bonds payable and indicates that cash has been generated by the additional bonds issued.

A negative sum implies a decrease in bonds payable. It indicates that the cash was used up in repurchasing or redeeming the bonds payable.

Stockholder’s Equity

An escalation in the owner’s stock accounts is stated as positive totals in the financing activities segment of the cash flow statement. It indicates that the cash was offered by issuing more shares of stock.

The examples of the uses of cash which are stated as negative sums include cash expenditure on repurchasing the stock previously issued, to settle for a debt, to pay interest on the debt, and to settle the dividends to the shareholders.

What Are Some Examples of Financing Activities?

Both cash inflows and outflows from creditors and investors are considered financing activities. Anything to do with the movement of money is a financial activity.

Some examples of cash flows from financing activities are:

• Issuing bonds (positive cash flow)
• Sale of treasury stock (positive cash flow)
• Loan from a financial institution (positive cash flow)
• Repayment of existing loans (negative cash flow)
• Cash from new stock issued (positive cash flow)
• Payment of cash dividend to stockholders (negative cash flow)
• Purchase of treasury stock (negative cash flow)
• Repurchase of existing stock (negative cash flow)
• Redemption of bonds (negative cash flow)

These activities may or may not involve the use of cash. However, only activities that affect cash are reported in the cash flow statement. The activities that don’t have an impact on cash are known as non-cash financing activities. These include the conversion of debt to common stock or discharging of a liability by the issuance of a bond payable.

The financing activities of a business provide insights into the business’ financial health and its goals. A positive cash flows from financing activities may show the business’ intentions of expansion and growth. With more money is flowing in than flowing out, a positive amount indicates an increase in business assets.

Negative cash flows from financing activities, on the other hand, can signal improving liquidity position of the business and also provide information about its dividend policy.

Simplify Your Financing Activities with FreshBooks

Understanding and managing financing activities is crucial for the financial health of any business. From tracking loans and equity to generating reports for informed decision-making, it’s essential to have the right tools.

FreshBooks accounting software can simplify this process. With FreshBooks, small business owners can easily:

Track loans and expenses: Keep a clear record of all financial inflows and outflows.

Manage equity transactions: Record the issuing or repurchasing of stock accurately.

Generate financial reports: Create statements of cash flow and other reports to gain insights into your financing activities and overall financial position.

By using FreshBooks, you can gain better control over your financial activities, enabling you to make informed decisions about your business’s financial future.

To learn more about how FreshBooks can help you manage your financing activities and overall business finances, contact us or start your free trial today.

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