Cash flow from financing activities, also called financing cash flow, is the net cash flow associated with payments made from and to the firm’s capital providers.
Cash flow from financing activities is one of three sections in the cash flow statement, the other two being cash flow from operating activities and cash flow from investing activities.
Common uses (outflows) of financing cash flow include debt repayment, payment of dividends to shareholders, and cash used to repurchase shares (for public companies). Common sources (inflows) of financing cash flow include proceeds from new debt financing and proceeds from equity issuance.
Some firms, such as fast-growing firms and firms going through a corporate restructuring, may be temporarily unable to generate positive operating cash flow. With the exception of any cash inflows from selling off assets (which may be common in the case of a restructuring), firms have two means of financing an operating deficit. First, firms can finance operating deficits out of existing cash balances. Second, firms can finance operating deficits by raising outside debt or equity capital. Funds raised from outside financing sources will show up in the financing cash flow section of the cash flow statement.
Often, large firms maintain a target capital structure (a targeted mix of debt and equity) which allows the firm to reduce its cost of capital. Maintaining a target capital structure requires such firms to continually issue new debt and repay existing debt. Even some smaller companies may rely heavily on outside financing to fund working capital needs.
