A statement of cash flows shows the progression of cash in a business, much like a checkbook ledger follows the progression of cash in a checking account. Financing activities may provide cash flows and show up on the statement. Net borrowings falls under financing activities and shows the amount of cash that was received from loans.
A statement of cash flows is a financial statement that a business creates to show how and where money is spent each year. An income statement will show revenue and expenses from business operations, but these are not necessarily shown on a cash flow statement. A statement of cash flows only shows revenues and expenses that were received and paid in cash. The statement shows cash activities from operations, investment, and financing.
Net borrowings is a line item showing the total amount of money borrowed for financing activities for a business. This can include short term notes, long term notes, and other payable accounts. The total amount of net borrowings includes all amounts borrowed minus all amounts of cash on hand.
Net borrowings is shown on the statement of cash flows under financing activities. This amount is found by adding the total of all borrowings and subtracting cash on hand. This amount shows the outstanding debts the company would owe if all cash on hand was used to pay all debts owed.
Understanding the changes in net borrowings helps to understand how a business is performing financially. Net borrowings stands for the amount of cash received from financing. If cash flow has increased but net borrowings has increased more than cash flow, then it could mean a company is in a poor financial position. This means the increase in cash flow came from borrowing money, not from increased sales. However, decreased net borrowing could indicate a strong financial position by decreasing the amount of debt.