Tuesday, August 15, 2006

Financing cash flow or CFF

Financing cash flow (or CFF) is usually the last instalment in this trilogy within the trilogy (phew!) i.e. that last portion of the cash flow statement and it deals with the financing needs (both equity and debt) of the company. This would usually involve repayment of debt, or increase in borrowing, dividend payment, equity capital reduction, increase in equity, share buyback etc.

Ok, ok, this may be too heavy, let's go back to Finance 101. A firm needs capital to run its business. There are two ways to get capital,

1) you borrow from bank, this is call debt
2) you raise money from the stock market, this is call equity

Financing cashflow deals with what the firm does with its capital. Increase debt? Decrease debt? Increase equity? Reduce equity? Pay dividend? Or outright equity reduction etc.

Hence, it would be useful to observe how the company is changing its capital structure from this part of the statement. Just like it would be useful to see if your spouse finance her spending needs through debt or something else (most likely through you though), and since buying a company entails as much commitment as sleeping with someone for the rest of your life, it pays to know.

In Singapore, a lot of companies are trying to reduce its equity base (SPH, Singpost etc) in order to make some financial ratios (like ROE) look good. (i.e. some spouse is trying to fake financial stability here) However that is just part of the story, the other part is *drumrolls* to return money back to their No.1 shareholder: Temasek Holdings. Of course, minority shareholders will stand to benefit as well, hence while it last, it would not be a bad idea to invest in these stocks.