What is cash flow from financing?
Cash from borrowing, repayment, owner contributions, and distributions. A bakery reads it when a line-of-credit draw lands in the bank.
Definition
Cash flow from financing is the cash that moves because of loans, repayments, owner money in, and owner money out. On the books, this is the bottom section of the Statement of Cash Flows, not a profit figure and not the bakery's daily sales.
A bakery reads it when a line of credit draw lands, when a loan is paid down, or when the owner puts money in or takes money out. Those moves change cash without being flour sales or oven purchases.
It is a cash section, not an accrual leftover. The draw is cash in; a later principal payment is cash out.
Interest on the same loan is a cost on the Income Statement. This section only counts the cash principal and the owner money that actually moved.
Where it shows up
Cash flow: Located below investing on the Statement of Cash Flows.
Balance Sheet: Related to loans, equity, and distributions.
P&L: Related to interest, which is not this section.
See also: Statement Of Cash Flows · Principal Payment · Distributions
When you look at your Statement of Cash Flows, this block sits under investing. Operating cash is the day-to-day running of the bakery; investing cash is mixers and ovens; this block is loans, owner money in, and owner money out.
When the figure is a large inflow, the bakery borrowed or the owner put money in. When it is a large outflow, the bakery paid down principal, sent distributions, or both.
The Balance Sheet holds the matching balances. A draw raises the line of credit; a principal payment lowers notes payable.
The Income Statement does not print this section. Interest sits there; the cash principal does not.
Equity moves when the owner puts money in or takes money out. Those cash legs still belong in this section, not in flour sales.
A month can show a healthy profit while this section is an outflow. Paying down a loan uses cash even when the ovens are busy.
How it works
The bakery borrows, or it pays a loan back. Both are cash events in this section.
A draw on the line of credit brings cash in. The matching credit raises the line of credit on the Balance Sheet.
A principal payment sends cash out. Only the principal portion belongs here; interest is a P&L cost.
The owner can put money in. That owner's capital contribution is a financing inflow, not bakery revenue.
The owner can take money out. Distributions and similar withdrawals are financing outflows, not oven expenses.
Stay with the cash that actually moved. A loan that is approved but not drawn does not appear here yet.
Do not treat a flour purchase as this section. Paying vendors is operating cash; buying a mixer is investing cash.
Treasury stock is shares the company buys back and holds. That buyback is a financing outflow when it happens.
After the month closes, this section is the period's loan and owner cash story. Next month starts the count again from the new balances.
Add this section to operating cash and investing cash, and you have the period's net change in cash. That total should tie to the movement in the bank.
Example
Rise & Crumb Bakery draws $25,000 on its line of credit to cover a flour order and a slow week. Cash in the register account goes up, and so does the line.
The draw is:
Debit: Cash $25,000
Credit: Line of credit $25,000
That $25,000 is a financing inflow, not bakery revenue and not an operating collection. The Balance Sheet shows more cash and a larger line of credit.
If the bakery later pays $4,000 of principal on a term loan, this section shows a $4,000 outflow. Interest on that payment still sits on the Income Statement.
An owner's $10,000 capital contribution is also an inflow here. It raises equity; it does not raise bread sales.
Last March this section was a $6,000 outflow because the bakery paid down the line. This March's $25,000 draw is the other direction.
Common mix-ups
Cash flow from financing is not the same as cash from operations. Operations is the day-to-day running of the bakery; this section is loans and owner money.
Cash flow from financing is not the same as interest on a loan. Interest is a P&L cost; the cash principal that moves with a loan sits here.
Cash flow from financing is not the same as the bank balance. The bank balance is a snapshot; this section is only the loan and owner cash that moved this period.
Related terms
- Statement Of Cash Flows: A statement that explains how cash moved through operating, investing, and financing activities during a period.
- Notes Payable: Formal loan balances owed to a bank or other lender.
- Principal Payment: The portion of a loan payment that reduces the balance owed.
- Distributions: Payments of profit out to owners or shareholders.
- Owner's Capital Contribution: Money an owner puts into the business.
- Line Of Credit: A revolving loan the business can draw on and repay as cash needs change.
- Net Change In Cash: The total increase or decrease in cash across all three cash-flow sections.
- Treasury Stock: Shares the company has bought back and holds itself.