A STUDY ON FUND FLOW STATEMENT IN KOTAK

MAHINDRA BANK
1. INTRODUCTION
Financial management is an important function in any organization. Every enterprise, whether big,
medium or small needs finance to carry on its operations and to achieve its targets. Finance is so
indispensable today that it is rightly said that it is the life blood of an enterprise. Without adequate
finance, no enterprise can possibly accomplish its objectives.

Capital required for a business can be classified under two main categories namely fixed
capital and working capital. Fixed capital stands for that amount of capital which is required for
long term and to create production facilities through purchase of fixed assets such as plant,
machinery, land and buildings. Working capital refers to that part of the firm’s capital which is
needed for financing short term or current assets such as cash, marketable securities, debtors and
inventories. Working capital in brief, is the amount of funds necessary to cover the cost of
operating the enterprise. Just as circulation of blood is essential in the human body for maintaining
life of a person, working capital is very essential to maintain the smooth running of a business.

Today, the financial manager gives greater importance to management decision-making and
policy. Today, the financial manager is not in a passive role of a store keeper of the accounting
information and arranging funds, whenever directed to do so. Rather, he occupies a key role in
solving the complex management problems. He now responsible for shaping the fortunes of the
enterprise and is involved in the most vital management decision of allocation of resources for
Nerolac Paints.

FUNCTIONS OF FINANCIAL MANAGER

 Investment or long term asset- mix decision.

 Financing or capital- mix decision.

 Dividend or profit allocation decision.

 Liquidity or shot term asset-mix decision.

Investment Decision:

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MAHINDRA BANK
Investment a decision of allocation of capital budgeting involves the decision of allocation of
capital or commitment of funds to long-term assets that would yield benefits in the future. Two
important aspects of the investment decisions are,

a. The evaluation of the prospective profitability of new investment.

b. The measurement of cut-off rates against the prospective return of new investments.

There is a broad agreement that the correct cut-off is the required rate of return or the opportunity
cost of capital. However, there are problems in competing the opportunity cost of capital in practice
from the available data and information.

FINANCING DECISION

Financing decision is the second important function to be performed by the financial manager.
Broadly, he or she must decide when, where and how to acquire funds to meet the firm’s
investment needs. The central issue before him or her is to determine the proportion of equity that
is the firm’s capital structure. The financial manager must strive to obtain to best financing mix or
the optimum capital structure for his or firm.

DIVIDEND DECISION

Dividend decision is the third major financial decision. The financial manager must decide
whether the firm should distribute all profits or retain them, or distribute a portion and retain the
balance. Like the debt policy, the dividend policy should be determined in terms of its impact on
yr. shareholders value.

LIQUIDITY DECISION:

Current assets manager that affects a firm’s liquidity is yet another important financial
function, in addition to the management of long term assets. Current assets to be managed
efficiently for safeguarding the firm against the dangers of liquidity and risk.

FUNDS FLOW STATEMENT

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 A STUDY ON FUND FLOW STATEMENT IN KOTAK
MAHINDRA BANK
The term “Flow” means change and therefore, the term “Flow of Funds” means “Change
in Funds” or “Change in working capital”. In other words any increase or decrease in Working
Capital means, “Flow of Funds”.

Concept of Funds Flow statement:

According to the International Accounting Standards – 7 on “Statement of changes in

financial position” also recognize the absence of single, generally accepted, definition of the term.

Funds Flow statement is a summary from that indicates changes in items of financial
position between two different balance sheets dates showing clearly the difference sources and
applications of funds. The major purpose of the funds statements is to provide a detailed
presentation to the result of financial management as distinguished from operating management.
Its summarizes the financing and investing activities of the enterprise. The statement shows
directly information that readers of the financial report could otherwise obtain only the making an
analysis and interpretation of published balance sheets and statements of incomes and retained
earnings.

Balance sheets are statements of financial position. Whereas funds flow statement are
obviously statements of “changes “in financial position. Balance sheets show the status of a day
in contrast, funds statement income statement and statement of retained earnings over period of
time they provided the explanation of why the balance sheet items have changed. The
conversational financial statements show mostly the position of accounting, rather than the
financial condition of the business interims of flow of funds. However, since all financial events
are reflected in the conventional statements, it becomes easy to unearth unusual trends and
promotions by the use of the analytical methods like the funds flow statements.

The Funds Flow statement is widely used by the financial analyst credit granting
institutions and financial managers in performance of their jobs. It has become a useful tool in
their analytical kit. This is because the financial statements i.e., “Income Statements” and the
“Balance Sheets” have a limited role to perform. Income Statement measures flow restricted to
transactions that pertain to rendering of goods are services to customers. The balance sheet
consists of assets and liabilities as on particular date. It doesn’t shortly focus those major financial

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MAHINDRA BANK
transaction which have been behind the balance sheets changes. One has to draw inferences from
the balance sheet about major financial transaction only after comparing the balance sheet of two
periods.

1.1 PROBLEM STATEMENT

As a statutory obligation, every Nerolac Paints Branches has to prepare financial statements at end
of each financial year to know the exact financial position or the profit position and the capital
growth of the Nerolac Paints. The financial statement like P&L account and Balance sheet gives a
summary of company’s resources, profits or losses at a particular period of time. These statements
exhibit the financial events occurred in a given period of time. From this point of view the financial
statements fulfils the objective of organization very well.
But there are certain important financial matters, which can be known only through analysis of
these financial statements. Thus, it is important to know what funds are available during the period.
This underlines the importance of statement prepared to report movement of funds. Thus the
problem taken for study “FUND FLOW ANALYSIS FOR NEROLAC PAINTS AT
BANGALORE”.

1.2 NEED FOR THE STUDY

Financial Statements: - Financial Statements are the summary of transactions conducted during
an accounting period in a business.

Financial statements are broadly classified into four types.

1. Position statement-Balance sheet

2. Income statement-Profit & Loss A/c

3. Statement of retained earnings-Profit & Loss Appropriation A/c 4.

Statement of changes in financial position-cash flow & Funds Flow statement.

1. Analysis of financial statement-Financial statement analysis may be classified into different

categories depending upon

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 A STUDY ON FUND FLOW STATEMENT IN KOTAK
MAHINDRA BANK
A. On the basis of material used, &

B. On the basis of the method of operation fallowed in the analysis.

A. On the basis of material used:-On the basis of material used analysis of financial statement is
of two types.

(i) External analysis

(ii) Internal analysis.
(i)External analysis:-External analysis is conducted by outside interested parties based upon
audited financial statements.

(ii) Internal analysis:-It is conducted by managers with in the Nerolac Paints organizations for
planning and decision making purposes

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to know the overall financial position of the Nerolac
Paints from 2014-2018.

 To study the financial performance of the Nerolac Paints.

 To study the sources and applications to the cash
 To find out the financial stability of the Nerolac Paints firm
 To know how effectively the Nerolac Paints is using its resources
 To measure the extent to which the company’s using its needs through borrowing.
 To make an overall view on theoretical approach of cash Flow and funds flow statements.

1.4 SCOPE OF THE STUDY

The project contains the profile of the company i.e. Nerolac Paints Limited where the project work
was undertaken. It contains details regarding how Fund is managed at Nerolac Paints Limited and
also where fund comes & gone statements at Nerolac Paints Limited.

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 A STUDY ON FUND FLOW STATEMENT IN KOTAK
MAHINDRA BANK
This study gives the information about financial aspects of Nerolac Paints Limited from to 2014
to 2018. This study was done in the time duration of 4 weeks from the information provided by
concerned officials of Nerolac Paints Limited.
The study of various financial statements through techniques of “fund flow analysis” is confined
to Nerolac Paints Limited.
Fund flow analyses of financial performance from financial statement May guides propose use of
available funds, and it gives early warnings of coming financial dangers. The purpose of funds
flow analysis is to calculate net increase or decrease in working capital of business during a period.
The study has employed three important aspects in order to analyse the utilization and application
of funds, with the help of various graphs.
 Funds flow statement
 Working capital statement
 Ratio analysis
Current ratio
Liquid ratio

1.5 RESEARCH AND METHODOLOGY

The chief criteria for the validity of any research study lies in its methodology. An enquiry would
prove a failure if it is not done along certain methodical lines.
The method of study adapted to carry out the project work is mainly through personal enquiry with
the Account’s Manager. The study comprises of the company‘s operations and the techniques
followed by them.
The data extracted from the annual reports of the company was analysed and further reduced to
tables. To make it pictorial and easier to grasp and understand the data was represented in graphical
forms.

SOURCES OF THE STUDY:

This is the study entirely based on:

 Personal discussion.
 Annual reports
 Published sources.

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 A STUDY ON FUND FLOW STATEMENT IN KOTAK
MAHINDRA BANK
 Simple statistical analyses.
There are mainly two types of data sources they are as follows:

PRIMARY DATA:

The data are originally collected by an investigator or agency for the first time for a
statistical investigation and used by them in the statistical investigation and used by them in the
statistical analysis and termed as primary data this data are collected directly from the source for
first time.

SECONDARY DATA:

The data published or unpublished which have already been collected and processed by
some agency or person and take over from there and used by any other agency for their statistical
work and termed as secondary data as for as second agency is concerned. The second agency if
and when it possible and files one who late uses this data.
Both primary and secondary data have collected for the study purpose primary interviewing certain
executive who were and work experience in the nature in order to gain as such as information as
possible.
Most of the data collected is secondary in nature and include:
 Annual report of the company.
 Other books and accounts maintained by the company.
 Internet
 Text books relating to financial management, management accounting

3. REVIEW OF LITERATURE
The latest Good Returns' survey of tax-effective offshore funds shows that funds flow into Indian-
based Open-Ended Investment Companies held up well in the September quarter compared to the
rest of the industry. Net funds flow (applications minus redemptions) for the quarter was $24.3
mill, exactly the same figure as it was in June quarter. While funds flow was positive the total
amount of money invested in the sector took a hit from poor fund performance with net assets
under management growing just 8% to $86.3 mill in the quarter. These figures compare well with

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MAHINDRA BANK
a very flat quarter for mainstream managed fund sector. According to researchers Fund Source the
Mumbai domiciled funds had net funds flows of $69.1 mill, which made it the worst quarter for
the industry since June 2018

It says the September quarter figure was down 81% on the $354 mill figure recorded for the
previous quarter this year. The second part of the Good Returns' survey covers money invested
into tax-effective Indian-based funds. There are three confirmed funds in this area, including
Money Managers First Step Mortgage fund, which is run by NZ Funds Management, and two
Frank Russell Funds (international shares and international bonds) which are market as ANZ's
Ascent investment programmer. First Step continued to attract significant volumes of new
investment, with a net funds flow of $39 mill, taking it to $219 mill net assets under management.
Although there are only three funds included in this part of the survey, it is understood that other
Australian based funds are being operated by managers, and quite a few managers are looking at
establishing funds offshore to get around issues of paying tax on capital gains. Although there are
concerns that these funds could lose their tax-advantage if the Government adopts the risk free
return model (RFRM) advocated by the McLeod tax review, that is unlikely to happen soon. Under
such a scheme investors would have to pay tax on the amount of money they have invested at the
start of the year no matter what happens during the year. This means that in a situation where
markets are declining in value investors would be paying tax although their funds are making
losses.
Hamburger (Hamburger, 1986) has brought about the distinction between project cost accounting
and project fund flows. He elucidates the importance and need to recognize and track them
separately. The conventional accounting practices account for the cost on accrual basis while the
cash flow occurs when the actual payment is made or received. Hence there is a difference of
timing between incurrence of cost and occurrence of cash flow related to it. Fund flows generally
lag behind the project expenditure (except when advances are paid or received). Although
Hamburger had stated what has been a known and practiced theory for the company accountants
and finance persons, he had highlighted a common misconception widespread probably among
project persons. It also seems ironical even today, the popular project management software such
as Microsoft Project; Primavera etc. do not make any distinction between the two. Fellows
(Fellows, 1982) showed how different policies and situations influence the cash flows for a

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MAHINDRA BANK
contractor. Considering variations in mobilization advances, retention amounts, pricing mark-ups
and effects of inflation and expected payment delays, effects on project profitability, financing
requirements and cash flows were studied on the basis of a typical building construction project.
Certain recommendations were made for increasing profits, reducing financing costs and
minimizing negative cash flows. He had also illustrated that the net working capital needs of a
typical project vary over a period of project; peaking at one time and then becoming positive,
making the project entirely self-financing.

Chen (Chen, 2007) reiterated that the terms fund flow and expenditure were being interchangeably
used by many project teams and Nerolac Paints organizations. Chen illustrated typical situation
for a project contractor where a cash deficit due to difference between cash inflow and fund
outflow gets created during project execution. He further stated that this cash deficit was needed
to be estimated accurately as it was to be financed on a short-term basis as working capital. He
therefore had demonstrated a step-by-step procedure to workout project fund flows using a tabular
format popularly known as spreadsheet, superimposing the basic project information such as
project cost breakdown and project payment schedule on project activity schedule. It has been
observed that the procedure illustrated by Chen, being based on the basic principles of cash flows,
is probably the most popular one among project contractors. These papers had brought forward
certain basic understanding and conceptual clarities on the topic of project fund flows. Firstly, the
difference between the terms ‘project expenditure’ and ‘project cash flows’ had become very clear.
Secondly, by listing different variables relating to project cash flows, the effect of the changes in
these variables on the contractor’s net cash flows had been illustrated. Thirdly, a simple process
for working out project cash flows integrated to project schedule had been explained.

Jarrah et al (Jarrah, Kulkarni, & O'Connor, 2007) collected actual cash flow data in form of
monthly account summary reports for various projects under Texas Department of Transportation.
The sample consisted of different category of projects such as construction and replacement of
bridges, new no freeways, road overlay and rehabilitation of existing roads, landscape scenic
enhancements, widening of freeways etc. Projects were further classified in different cost ranges.
Based on the scatter chart of payments against time for different projects in a given category, a
fourth degree polynomial regression analysis was used to obtain the cash flow curves that turned

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MAHINDRA BANK
out to be characteristic ‘S’ shaped for most of the projects. Although statistical significance could
not be proved due to availability of limited data, a feasible approach for cash flow prediction was
established. Since the data was related to payments to the contractor, only the cash inflow curves
could be established. Extending the same methodology to data for contractor’s cash outflows, there
appears to be a possibility of working out net working capital gap. A model developed by Görög
(Görög, 2009) suggested a set of new measurements and indicators in line with the ‘earned value’
measurements and indicators for possible integration of both systems. Therefore similar to the
earned value measurements such as Budgeted Cost of Work Scheduled (BCWS), Budgeted Cost
of Work Performed (BCWP) and the Actual Cost of Work Performed (ACWP) for working out
the Cost Performance and Schedule Performance Indices (CPI and SPI); the new set of
measurements and indicators was based on the ‘Price Value’ and ‘Invoice Value’ of the contracted
work. This could therefore forecast the difference between price to be received by the contractor
from client and the cost to be expended by the contractor for the amount of work carried out at any
point of time. Hence the differential indicated expected margin based on project status. However,
the methodology. Explained in the model worked out the values on accrual basis and did not
recognize the time difference in their occurrence and therefore could not be found useful to forecast
and monitor cash flows in financial sense. In a paper published by Maniar (Maniar, 2011) a model
for finding the Least Working Capital (LWC) which is the maximum cumulative negative cash
flow during a project was proposed and validated on the basis of a sample of Indian infrastructure
projects. It considered different cost parameters such as labour, material, overheads,
subcontracting charges, machinery and equipment expenses, etc. Assuming uniform rate of
expenditure during contracting period the model using a multiple regression analysis on the sample
data estimated the LWC as the total of project expenses till the receipt of the first payment from
the client. Although this approach was different than the one taken by other researchers that
projected component cash flows on ‘S’ curve basis, it probably failed to recognize the fact that the
maximum gap between receipts and payments on a project mostly occurs in the middle portion of
the project and not necessarily before receipt of the first payment from the client. In fact, due to
mobilization advances received by the contractors, there is a cash surplus with the contractor in
the beginning of the project. Also it is seen that the rate of expenditure is not uniform in
engineering projects except for the linear projects such as construction of road, bridges, tunnels,

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MAHINDRA BANK
railway tracks etc. that were taken as sample by the author. Therefore, this model is not considered
of any significance to our study.

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