What Are Financing Activities?
Financing activities refer to business transactions involving long-term liabilities, owners’ equity, and short-term debts. The cash flow from financing activities is the net amount of funding a company generates in a given period. It comes from transactions between the company and its investors and creditors. A business has cash inflow when it receives money from issuing notes payable to its creditors or issuing stocks to investors, and cash outflow when it pays off the debt or distributes dividends to shareholders. Investors and lenders look into a company’s cash flow from financing activities to gauge its financial strength. The report also provides insight into how well a business manages its capital. Don’t deal with the overwhelm of creating financial statements for your business. Skynova’s accounting software makes generating financial reports a breeze. Keep reading to learn more about financing activities and why they’re important.
What Is the Cash Flow From Financing Activities?
- Borrowing and repaying short-term loans
- Borrowing and repaying long-term loans and other long-term liabilities
- Issuing or repurchasing their own shares of common and preferred stock
- Paying cash dividends on their capital stock
The cash flow from financing activities follows the movement of cash between a business and its owners, investors, and lenders. It shows how the company manages its capital to finance its operations, pay off its debts, and disburse dividends.
Businesses decide how often they create cash flow statements depending on the number of transactions they have. For some companies with a lot of cash movement, a weekly or monthly statement is warranted; for others, quarterly or yearly works just as well.
What Are Some Examples of Financing Activities?
Examples of cash flows from financing include cash from the issuance of notes or bonds payable, cash proceeds from the issuance of capital stock, and cash payments for dividend distributions. A business reports money received from short-term loans and long-term loans as cash inflows. It also records cash inflow when it gains cash from issuing bonds or shares of stock.
Cash inflows increase the amount of cash and cash equivalents. On the other hand, activities that reduce the company’s cash and cash equivalents include repaying short-term or long-term liabilities, distributing cash dividends to stockholders, and redemption of previously issued bonds payable.
Below are definitions and examples of the accounts that are increased or decreased by a company’s financing activities.
Liabilities
A company’s financing activities affect the amount of short-term or long-term liabilities they report on the balance sheet. A short-term liability refers to financial obligations that need to be paid within one year, and they’re listed in the current liabilities section of the balance sheet.
Short-term liabilities related to financing activities include dividends payable, short-term loans, and the current payable portion of long-term liabilities. Note that short-term liabilities and the current portion of long-term debt are listed separately in the balance sheet. This is done to provide an accurate picture of a company’s liquidity and its ability to pay current obligations as they come due.
Long-term liabilities refer to financial obligations that are not due within 12 months or the company’s operating cycle, whichever is longer. Long-term liabilities are also called long-term debts or noncurrent liabilities. Examples of long-term obligations related to financing activities are bonds payable, long-term notes payable, and mortgage payable.
Businesses take on long-term debts to obtain funds to invest in new projects or buy capital assets, such as buildings or land. A company’s ability to pay its long-term liabilities represents its long-term solvency.
Stockholders’ Equity
Stockholders’ equity refers to the book value of a company. It’s calculated by deducting the total liabilities from the total assets. A company’s balance sheet reports stockholders’ or owners’ equity.
Initially, a company’s equity comes from capital invested by the owners. Capital can also be obtained through share offerings when a company sells preferred or common stocks in the market. Over time, equity comes from the business’s retained profits through day-to-day operations.
A negative owners’ equity means the company owes more money than it owns. It could be an indication of impending bankruptcy unless the business gets an infusion of cash.
Cash Inflows
A company raises capital by issuing debt or equity. Issuing debt or borrowing doesn’t affect a company’s ownership because it doesn’t grant proprietary interest to creditors. The issuance of debt is a cash inflow. Examples of these financing activities include the sale of treasury stock, issuing bonds, and getting a line of credit or a loan from a financial institution.
Another way a business raises capital to finance its operations involves giving up some ownership stake in the company in exchange for funding. Issuance of equity gives the company additional cash, so it’s a cash inflow.
Cash Outflows
When a business issues debt or equity for cash, it gains capital to fund expansion or other projects. However, debt and equity have to be repaid at some point. These repayment activities result in cash outflows for the company. Interest payments for repayment of debts are cash outlays, but they’re not considered financing activities. They’re recorded in a separate section — the operating activities — of the cash flow statement.
Repayment of existing loans, the redemption of bonds, and the purchase of treasury stocks are all outflows related to paying off borrowed funds. For issued equity, earnings are shared with equity holders or stockholders through cash dividend payments. Now and then, a company might also decide to repurchase previously issued shares of stock. These are all financing activities that create cash outflows for the company.
Are Bank Loans a Financing Activity?
Yes, borrowing money on a short-term or long-term basis from the bank is considered a financing activity. However, the debt must be used to acquire capital or funding for a company and not for the business owner’s personal use. The resulting cash inflow is reported in the company’s statement of cash flow under the financing activities section.
Is Issuance of Bonds a Financing Activity?
Yes, the issuance of bonds by a company is a financing activity. Financing activities are cash flows between a business, its owners, and its creditors. Issuing bonds is a cash exchange between a company and a creditor.
Let Skynova Help You Manage Your Small Business Bookkeeping
The financing activities of a business give an overview of its financial health and future plans. An increase in the cash flow from financing activities shows the company’s attractiveness to both investors and creditors. More cash inflows than outflows also mean an increase in assets or equity.
Managing operations activities, financial investments, and financing activities are all part of cash flow management. Cash flow management is essential for every business. A company needs to manage its cash well to have money for expenses and expansion and to repay creditors and investors.
Keep track of the cash inflows and outflows from your financing activities with Skynova’s accounting software. Use the software to generate financial documents like balance sheets, income statements, and cash flow statements. A balance sheet shows your company’s equity standing, while a cash flow statement helps you identify whether your business has enough cash to pay for upcoming short-term and long-term expenses.
Explore our platform for other software products and business templates that can help you manage your business’s finances.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional for specific and individual accounting advice.
What Are Investing Activities?
Being mindful of cash flow is essential for small business owners. Investing activities represent an example of cash flow that relates to the acquisition of long-term assets. A company’s balance sheet generally reflects investing activities as one of the major net cash entries for any accounting period.
This article will explain investing activities in greater detail and show how they can appear on a company’s statement of cash flows.
What Are Investing Activities?
Investing activities refer to two major kinds of net cash activities that appear in a company’s investing section on its balance sheet: long-term assets and investments. Fixed assets, such as your business’s real estate, vehicles, or other requisite machinery, are considered long-term assets. Investments include any cash paid to the principal amount of a loan held by a third party, cash equivalents, or trade securities held by the company. It’s important to understand the difference between investing activities and operating activities.
Operating activities are strictly those that a company performs to secure income. For example, if a company purchases a new factory unit and pays for that building in cash, the cash outflows associated with that purchase would be considered an investing activity. By contrast, imagine that the company takes out a loan for that same factory unit. When the company begins making payments on that loan, the cash payments made toward the principal on the loan would be considered part of its long-term investments. In contrast, interest payments would be classified under the operating activities section.
What Are Some Examples of Investing Activities?
Investing activities are not only related to big purchases and stock options. There are a number of examples of business cash flow that can be classified as investing activities. Some of these investments represent immediate cash flow for your company, and others accrue value over time.
The following sections break down the most common kinds of investing activities for small businesses.
Investment Purchases
Investment purchases include any expenditures made by a business toward property, plant, and equipment (PP&E) or the purchase of marketable securities (such as stocks and bonds). PP&E expenditures are often also referred to as “capital expenditures.” While cash flow certainly decreases any time a company makes a big purchase like this, investments that add to a company’s current assets or represent the means by which a company can increase positive cash flow (such as through stock dividends) show that a business has verifiable growth possibility.
Investment Sales Proceeds
In the event that a company increases its overall capital assets via proceeds from the sale of PP&E or other equivalents, these investment sales proceeds count as investing activities. Natural depreciation may mean that all investments a company makes do not get sold for the same price for which they were purchased. Even the sale of long-term assets at a discounted or reduced price that causes the company to lose money on the investment overall still increases the cash flow amount that will appear in its balance sheet’s investing activities section.
Fixed Asset Purchases
Generally speaking, companies acquire many of their fixed assets using credit rather than cash, as these assets tend to be among the more expensive. A few examples of fixed asset purchases would include a company acquiring another business, a new fleet of vehicles, or even the land on which future properties might be built. Each time that the company makes a payment on the loan used to acquire that fixed asset, the principal amount of that payment will appear as a decrease in the cash flow in the investing activities section of the statement of cash flows.
Fixed assets accrue more slowly and are not typically intended to represent cash for the company in question for at least the first year of their acquisition. Fixed assets of a smaller nature, such as computers, furniture, and software, may not become liquid for several accounting cycles.
Fixed Asset Sale Proceeds
Another way that a fixed asset can increase the cash flow in a company’s investing activities is through the sale of that fixed asset. When a business sells off another business it owns, that sale is called divestiture. Any proceeds from that divestiture, or proceeds from the sale of any property, vehicle, computers, etc., that the company owns would all go into the balance sheet as investing activity cash received. Remember that even a sale wherein a business might not recoup its original investment amount shows up as an increase in its investing activity line item.
Understanding Investing Activity Cash Flow
Cash flow from investing activities is its own line item on a business’s cash flow statement. The cash flow statement is one of the major financial statements that companies are responsible for preparing. Because they can indicate a company’s current and potential prosperity, investing activities are among the most important line items to appear. There are different terminologies that a business owner needs to understand with regard to investment activities.
For example, reporting negative amounts of cash from investing activities is a good sign. How can negatives be good? Negative cash flow from investing activities means that a company is investing in capital assets. As the valuation of those assets grows, they increase the net cash flow available to the company over time. So, while investing activities may require short-term expenditures, they represent long-term gains.
The next two sections provide a bit more information on the cash inflows and cash outflows that come with investing activities.
Cash Inflows
Cash receipts from investing activities are known as cash inflows. Any cash that a business collects from the sale of long-term assets or the sale of a loan at a discounted rate counts as a cash inflow. Likewise, any selling or trading of marketable securities or the principal collected from third-party loans not generating sales are also examples of cash inflows in investing activities. Remember that not all money that comes into a business counts as a cash inflow. For example, suppose a company receives an interest payment from a third-party partner to whom the company has loaned money. In that case, that interest payment counts as an operating activity on the balance sheet, not an investing activity.
Cash Outflows
Cash outflows in investing activities impact a company’s net income. These outflows include the purchase of long-term assets, the purchase of marketable securities, and the payment of principal loan amounts on third-party notes that do not generate revenue.
Let’s say that a company acquires another business during a given accounting period. While that acquisition almost certainly cost money, either via direct cash outlay or credit, the net cash associated with the business that was bought would appear as an increase in the investing activities line item.
Let Skynova Help You Manage Your Small Business Financing Activities
Investing activities represent a dynamic part of any small business’s accounting practices. The amount of cash appearing on a company’s income statement can vary almost by the minute depending on its investing activities, and things can get hectic fast.
However, keeping up with investing activities so that your company can thrive is easy with insightful products like Skynova’s accounting software. From deposit requests to purchase orders, Skynova’s business templates can help your company stay on top of its current assets and prospects. Check out Skynova’s software products today and streamline your company’s small business accounting.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to learn the best course of action when making decisions about your company’s investments.
https://www.skynova.com/learn/accounting/financing-activitieshttps://www.skynova.com/learn/accounting/investing-activities
