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Financing Cash Flow

Financial Statements

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All company funding generally comes from three sources. It enters the company through Loan, Investment, or Generated Revenue. Financing Cash Flow records cash flows into or out of the company from Loans and Investments. Subsidies or Grants, if applicable, may also appear here. Essentially, it covers non-internally generated cash flows, since Cash Flow from Operations measures inflows from sales and revenues, and Cash Flow from Investments measures inflows from investment returns.

Additions to (Reductions in) debts and Deferred Liabilities

This section is generally split into several possible categories. They include Short Term Debt, Long Term Debt, Deferred Debt, and Other Liabilities. They all operate similarly on the cash flow statement. When loans are incurred they result in cash flowing into the company and liabilities being increased. Cash Inflows represent new loans. As loans are paid off cash exits the company and loans are slowly repaid. Cash Outflows represent repayment. This section is extremely useful in comparison to earnings and cash flow from operations. If the Cash Inflows from debts and deferred liabilities are increasing while earnings or cash flow from operations is decreasing, the company is using debt to cover itself in the short run.

Warning about Cash Inflows from Debt

Beware if Additions to Short Term Debt, Long Term Debt, or Deferred Liabilities is steadily trending upwards while Cash Flow from Operations and Retained Earnings are decreasing. This company is using debt to cover the cash flow decreases generated by operations. Beware if this number is constantly growing faster than cash flow from operations or company earnings. The company is accumulating debt while business stalls. This debt will come due, and the company will be in a very bad position when repaying it. You should avoid firms in this situation.

Net Issues of Shares, Common Shares/Stock

A company issues shares in order to raise capital for business expansions or to fund current operations. These result in cash inflows to the business. Occasionally the company can afford to purchase back shares. If issued shares are repurchased by a company, the company sends cash to investors that owned the shares. This results in a cash outflow.

Look for Financing Outflows, Avoid Inflows

As a quick note, you should seek out companies that regularly purchase shares from investors. Skilled companies will frequently use retained earnings for share buybacks. Purchasing shares is important for you. The reduced number of shares on the market raises the value of all other shares. A company that regularly reduces shares increases per share earnings for investors.

A company that regularly issues shares reduces per share earnings for the investor. More shares on the market mean that there is higher supply with the same demand. The result is a lower value for shares. This erodes the benefit of owning them.

Dividends

Dividends are always an outflow to investors who own stock. Dividends are great for investors since they boost the return of the investor when received. Unfortunately, they are not always great for companies. If the company is going through a period where they have low or negative cash inflows and low earnings, paying dividends only magnifies the problem. Cash that could be used to shore up an unstable company is paying investors instead. Look through the firm’s history and see if current management continues to pay dividends while the business is on the rocks. You should prefer they use funds to solve their own problems. Dividends accrue when not paid, so they will be paid in when a company stabilizes, but a business that doesn’t exist cannot pay future dividends.

Financing Cash Flow

Cash Provided by Financing Activities summarizes all cash flows relative to financing the company. This section is very useful to potential investors to see how the company is funding itself. This section is also useful for its dividends, share issues, and share purchases section, which can show you how the company handles the values of the shares that investors own.

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