The fund flow statement is a financial statement that records the inward and outward flow of business funds or assets. It identifies the reason for a change in the financial position of a company by comparing two years’ balance sheets.
This statement helps stakeholders understand how funds are generated and whether it has been utilised prudently. It provides insights into a company’s financing activities, investment decisions, and liquidity position, thereby assisting in financial analysis and decision-making.
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What is a Fund Flow Statement?
A fund flow statement contains the reason for a change in working capital. It maintains inflows and outflows of businesses and offers information about the increase or decrease in a company’s financial metrics. It does so by comparing two different balance sheets. It focuses on the movement of funds within the organisation and helps in analysing the sources and uses of funds.
How are Funds Generated?
- Increase in Shareholders’ Equity
Funds can be generated through issuing new shares or additional capital contributions by shareholders.
- Increase in Long-Term Liabilities
Companies can also raise funds by obtaining long-term debt, such as loans or bonds.
- Decrease in Working Capital
Another way of generating funds is by reducing a company’s investment in current assets or by controlling current liabilities.
- Non-Operating Income
Companies can also generate funds through non-operating activities, such as the sale of assets or investments.
What is the Application of Funds?
- Cover Capital Expenditures
Funds can be used for acquiring or upgrading long-term assets, such as property, plant, and equipment.
- Support Debt Repayment
Another significant use of funds is to make repayment of long-term debt obligations, including principal and interest payments.
- Increase Working Capital
Funds can be utilised to increase investment in current assets or to settle current liabilities.
- Pay Dividend and Make Distributions
The company distributes funds among shareholders in the form of dividends or to owners in the case of partnerships or sole proprietorships.
Importance of Fund Flow Statement
The fund flow statement, also known as a statement of changes in financial position, is an important report that provides valuable information about sources and uses of funds. It analyses changes in a company’s financial position between two balance sheet dates. It does so by focusing on the movement of funds from one account to another.
In addition, this statement helps in assessing the liquidity position of a business. Analysing the sources and uses of funds provides insights into how a company generates and utilises cash. It helps identify if a company is generating enough funds internally to meet its financial obligations, such as debt repayments, capital expenditures, and dividends.
Top Advantages of Fund Flow Statement
- Tracking Changes in Financial Position
A fund flow statement allows stakeholders to track the ups and downs of a company’s finances over a specific period. It provides a comprehensive view of sources and uses of funds, highlighting the movement of cash or cash equivalents within an organisation.
- Identifying Working Capital Management
This statement sheds light on a company’s working capital management. It provides in-depth information about changes in current assets and liabilities. Thus, highlighting how effectively a company manages its short-term resources. By analysing a fund flow statement, stakeholders can assess a company’s ability to meet its short-term obligations and identify areas where working capital management can be improved.
- Evaluating Financing and Investment Decisions
With the help of a fund flow statement, a company can evaluate the impact of financing and investment on a company’s financial position. By analysing sources of funds, stakeholders can assess how a company raises capital and whether it relies more on debt or equity.
- Enhancing Financial Analysis
The fund flow statement complements other financial statements, such as the income statement and balance sheet. It is mainly because it provides additional data about the movement of funds. By analysing these statements, stakeholders can gain a more comprehensive understanding of a company’s financial performance, profitability, and solvency.
Understanding the Analysis of Fund Flow Statement
The fund flow statement shows the comparison between various components of a balance sheet, mostly assets and liabilities. The increase in the asset side of a balance sheet refers to the fact that a company has incurred assets with the help of funds. This also indicates that these assets will channelise more funds in the future. Some examples of funds-producing assets are fixed assets, long and short-term loans, receivables, inventory, etc.
On the contrary, an increase in the liability side of a balance sheet indicates that a company needs to pay through fund inflows. Some crucial examples of liability are payments to lenders, customers, shareholders, etc.
Fund Flow Statement vs Cash Flow Statement
| Basis of Difference | Fund Flow Statement | Cash Flow Statement |
| Matter of Consideration | During an assessment, the fund flow statement considers the working capital. | The cash flow statement is a narrower concept than a fund flow statement which only considers the element of cash of the working capital. |
| Purpose | This statement generally lets the company know about sources of funds and its various utilisation points. | In this statement, a company can find the opening and closing balance of cash through various sources and uses. |
| Analysis | The analysts of a company can decipher the changes in net working capital through this statement. | Cash flow statements only allow companies to know the changes in cash flow. |
| Basis of Accounting | Fund flow statement follows the accrual basis of accounting. | The cash flow statement converts the accrual basis into a cash basis. |
| Result | This type of statement helps businesses to make financial decisions in the future. | This type of statement is ideal for taking into consideration the short-term goals involving the liquidity of the business. |
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FAQs
What happens when fund flow statements indicate a surge in working capital?
When current assets increase, it surges the net working capital of a business, thereby decreasing current liabilities. In this situation, the company can effectively use these funds to meet the requirement of day-to-day expenses, pay dividends and clear any short-term debts.
What is the outcome of the fund flow statement showing decreased working capital?
This situation arises when a company is unable to find a source of long-term funds whereas, the application of the same has increased. To cope with this situation, the company needs to raise loans for the payment of its obligations.
What do you mean by free cash flow and its effect on the fund flow statement?
Free cash flow is the amount of cash that a company has been able to generate to maintain the capital assets after spending the necessary funds. In fund flow and income statements, free cash flow acts as a profitability index.
What is Net Present Value?
The net present value (NPV) is the difference between the current value of cash inflows and current cash outflow values for a specific period. This metric is largely used in capital budgeting and for making investment planning for the upcoming financial year.
