Definition: Financing activities are transactions or business events that affect long-term liabilities and equity. In other words, financing activities are transactions with creditors or investors used to fund either company operations or expansions. These transactions are the third set of cash activities displayed on the statement of cash flows.
What Does Financing Activities Mean?
Financing activities show how a company funds its operations and expansions externally. Internal financing is not included. For example, a company that pays for its own plant expansion doesn’t need financing. Thus, no financing activities exist because equity and liability accounts are unchanged by the expansion.
Both investors and creditors are interested to see how efficiently a business can use its existing cash to fund operations and how effectively it can raise capital for upcoming projects. In a way, the financing activities section of the cash flow statement indicates how liquid a company is.
Example
Financing activities include both cash inflows and outflows from creditors and investors. Cash inflows from creditors usually consist of new loans issued to the company, while cash outflows from creditors include loan and interest payments. Issuances of bonds and bond payments are also consisted financing activities.
Cash inflows from investors occur from newly issued stock or contributions from partners; whereas, cash outflows from investors consist of dividends and owner distributions.
Not all financing activities affect cash, however. Some projects are financed directly. Take a company building a new building for example. If the building is completely financed by a mortgage, the cash account is never changed. The liability account is increased and the building account is increased.
