What section of a statement of cash flows indicates the cash used to pay dividends during the past accounting period?

Cash flow from financing activities is a section of the cash flow statement, which gives an overview of all cash entering and leaving the business over a set period. The cash flow from financing activities section, in particular, relates to the cash activities that deal with debt and equity. 

Cash Flow Types

The cash flow statement, also known as the statement of cash flows, is one of the three primary financial reports that businesses generate regularly, in addition to the income statement and the balance sheet. Most businesses using accrual basis accounting find keeping track of their cash inflows and outflows to be difficult, which is where the cash flow statement comes in. 

The cash flow statement gives a high-level overview of all cash movements over a period of time, like the previous month or quarter, and classifies those activities into one of three buckets to help business owners know which areas of the business are driving cash changes. 

The cash flow statement breaks down the cash flowing into and out of the business into three main categories. They are: 

• Cash Flow from Operating Activities: This category includes all cash that comes from the everyday operations of the business, or anything relating to net income. If the income or expense pertains to the primary work of the company, it belongs in this bucket. 
• Cash Flow from Investing Activities:  Income and expenses in this category come from the company’s investments in capital assets, like property, plant, and equipment. 
• Cash Flow from Financing Activities: This includes cash that comes in by issuing stock or debt, as well as cash paid out as dividends. 

Together these categories cover all the cash activities that may take place. Breaking them out into separate categories with line items under each allows business owners and any other interested parties greater visibility into cash movement. 

Sample Cash Flow from Financing Activities Section

What is a Financing Activity? 

Financing activities encompass a range of financial transactions. When a company issues equity, it will receive cash in return. This inflow of cash would be categorized in the cash flow from financing activities section. 

Likewise, when a company makes dividend payments or repurchases some of its debt or equity, this would result in an outflow of cash in this section. Broadly speaking, any activities relating to debt or equity would fall here. 

For example, many small businesses turn to loans to pay for new equipment or improvements to their business. When a company takes out a loan, they will receive an influx of cash, which will appear in this section of the cash flow statement as a positive inflow. They will also make payments on that loan to pay down the principle and interest, which will show up here as well as outflows of cash. 

The majority of cash flow items, however, will likely appear in the cash flow from operating activities section, since that deals directly with everyday operations. Both the cash flow from investing and cash flow from financing sections tend to see significantly less cash activity for most companies. 

Get Your Free Guide to Understanding Cash Flow

Cash flow is king. 

If your business sees multiple cash flow activities relating to debt or equity over a period, you (or an accounting professional) will need to calculate the total cash flow from financing activities amount. 

Let’s take a deeper look at how to calculate this: 

Cash Flow from Financing Activities = Cash Inflows from Equity or Debt – (Cash Paid as Dividends + Repurchasing of Debt or Equity) 

Put simply, cash flow from financing activities looks at all cash coming in from issuing debt or equity and all cash going out from dividend payments and from buying back debt or equity. 

The three variables involved in this formula can be defined simply as: 

• Debt: Debt means anything owed to someone else. For everyday citizens, this may be mortgages or car payments. For businesses, it most often means loans. Businesses may take out loans from the bank to finance new initiatives, equipment, etc. 
• Equity: On the balance sheet, equity means assets less liabilities. In other words, how much you have paid off (and therefore own) compared to how much you still owe on a big purchase. Again, think mortgages for an everyday example. 

  On the cash flow statement, however, equity refers more to ownership in the company through investors. When a company raises money through investors, it shows up in this category of the cash flow statement as a cash inflow. When the company makes payments to investors or buys back stock from them, it would show up as an outflow of cash.

• Dividends: A dividend is a payment to shareholders where a portion of a company’s earnings is split among those who have invested. How much is paid is managed by the company’s board of directors, and payment doesn’t always mean cash. It can also mean issuing more shares.  

Determining a Healthy Cash Flow from Financing Activities Amount

There’s no standard for a healthy amount of financing activities each month. What investors will look at is how a company’s financing and investing activities each stack up against operating activities. 

If your financing activities section shows a low or negative amount, it’s a good sign that you’re paying down debt. However, if your operating activities section doesn’t show a high number, the investor may worry about your ability to continue paying down debt.

A helpful line item to analyze your cash flow from financing activities is net borrowings, which shows all the money your business borrowed over the period less the cash that you have on hand. In other words, if you were to apply all cash to pay down your debt, would you be able to cover the whole amount? 

In many cases, that answer might be no, especially if you’ve just taken out a loan. However, this line can help you determine if, month after month, you’re trending in the right direction. If your positive cash flow is made up in large part by cash brought in through debt, it may be a sign of weak revenue. In an ideal world, the primary driver of your cash flow would be operating activities and cash flow from financing activities might supplement the business to fuel growth. 

Key Takeaways

Compared with the balance sheet and P&L statement, the cash flow statement leaves less room for interpretation. At the end of the day, cold hard cash can show quite a bit about how well a business runs and where problem areas might be. Cash flow from financing activities helps businesses understand their cash position when it comes to debt and equity specifically. However, like all financial reports, the value of this section comes in reviewing it habitually. 

Financial reports can be created as often as once a month, though some business owners may choose to review them only quarterly or annually. To get the most from your financial statements, reviewing them once a month will help you note changes in sections like cash flow from operating activities and become aware of any risks those changes may pose. 

Get Your Free Guide to Understanding Cash Flow

Cash flow is king.