FUND FLOW STATEMENT

also referred to as statement of source and application of funds provides insight into the movement of funds and helps to understand the changes in the structure of assets, Fund flow statement liabilities and equity capital. The information required for the preparation of funds flow statement is drawn from the basic financial statements such as the Balance Sheet and Profit and loss account. Funds Flow Statement can be prepared on total resource basis, working capital basis and cash basis. The most commonly accepted form of fund flow is the one prepared on working capital.
Elements of a Fund Flow Statement The query 'how to prepare a fund flow statement?', is often left unheeded. Preparing such a statement is quite easy all you need is a balance sheet and the appropriate proforma. The following is a small proforma of a fund flow statement and will give you a brief idea about how an ordinary fund flow statement shall look (+/-/total) 1. (+) (-) (+) (-) (-) (Total) 2. (+) (-) (Total) 3. (-) (-) (Total) (+) (Total) Income taxes paid Net cash flows from operating activities Cash flows from investing activities Proceeds from the sale of assets Dividends received Net cash flows from investing activities Cash flows from financing activities Dividends paid Net cash flows used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents balance brought down (at the beginning of year) Cash and cash equivalents balance carried down (at the end of year) Xx Xx Xx Xx Xx Xx Xx Xx Cash receipts from customers Cash paid to suppliers and employees Income from operations Interest paid Particulars Cash flows from operating activities Xx Xx Xx Xx Xx Xx Amount

As you have noticed, the fund flow statement basically concentrates upon the inflow and outflow of cash, in a given time period. The basic intention of making such statements is provide management personnel with appropriate figures of income and expenditures. The analysis of a fund flow statement is a crucial aspect of what is known as a balance sheet analysis. The statement in the balance sheet and annual report of companies often informs the investors of the performance of the company. Many people who consider a single balance sheet as a misleading document, consult the fund flow statement to clarify their doubts regarding the inward and outward cash flows of the year. In some companies, where the organization is engaged in per unit production, departments use fund flow statement analysis to derive the daily output of one production unit, be it a man or a machine. 'Depiction of monetary figures' is of at most importance and shortcomings of fund flow statement such

as ignorance of reputation, human quality, accuracy and quality of work, often make this statement a documents with certain limitations.

Advantages of Funds Flow Statement

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Funds flow statement is prepared to show changes in the assets, liabilities and equity between two balance sheet dates, it is also called statement of sources and uses of funds. Lets look at some of the advantages of preparing funds flow statement 1. Funds flow statement reveals the net result of operations done by the company during the year. 2. In addition to the balance sheet, it serves as an additional reference for many interested parties like creditors, suppliers, government etc to look into financial position of the company. 3. It shows how the funds were raised from various sources and also how those funds were put to use in the business, therefore it is a great tool for management when it wants to know about where and from funds were raised and also how those funds got utilized into the business. 4. It reveals the causes for the changes in liabilities and assets between the two balance sheet dates therefore providing a detailed analysis of the balance sheet of the company. 5. Funds flow statement helps the management in deciding its future course of plans and also it acts as a control tool for the management. Funds flow statement should not be looked alone rather it should be used along with balance sheet in order judge the financial position of the company in a better way.
CASH FLOW VS FUND FLOW

CASH FLOW A Cash Flow Statement is a statement which shows inflows and outflows of cash and cash equivalents of an enterprise during a particular period. It provides information about cash flows, associated with the periods operations and also about the entitys investing and financing activities during the period.

FUND FLOW Fund Flow Statement also referred to as the statement of Source and Application of Funds provides insight into the movement of funds and helps to understand the changes in the structure of assets, liabilities and equity capital.,

A fund flow statement is different from cash flow statement in the following ways i). Funds flow statement is based on the concept of working capital while cash flow statement is based on cash which is only one of the element of working capital. Thus cash flow statement provides the details of funds movements.

ii). Funds flow statement tallies the funds generated from various sources with various uses to which they are put. Cash flow statement records inflows or outflows of cash, the difference of total inflows and outflows is the net increase or decrease in cash and cash equivalents.

iii). Funds Flow statement does not contain any opening and closing balance whereas in cash flow statement opening as well as closing balances of cash and cash equivalents are given.

iv). Funds Flow statement is more relevant in estimating the firms ability to meet its long-term liabilities, however, cash flow statement is more relevant in estimating the firms short-term phenomena affecting the liquidity of the business. v). The Cash Flow statement considers only the actual movement of cash whereas the funds flow statement considers the movement of funds on accrual basis.

vi). In cash flow statement cash from the operations are calculated after adjusting the increases and decreases in current assets and liabilities. In funds flow statement such changes in current items are adjusted in the changes of working capital.

vii). Cash flow statement is generally used as a tool of financial analysis which is utilized by the management for short- term financial analysis and cash planning purposes, whereas funds flow statement is useful in planning intermediate and long-term financing.

NEED FOR FUNDS FLOW STATEMENT The Funds Flow Statement is widely used by the financial analysis and 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 Statement and the Balance Sheet have a limited role to perform. Income Statement measures flow restricted to transitions that pertain to rendering of goods and services to customers. The Balance Sheet is merely a static statement. It is a statement of assets and liabilities as on a particular date. USES OF FUNDS FLOW STATEMENT Funds flow statement helps the financial analyst in having a more detailed

analysis and understanding of changes in the distribution of resources between two balance sheet dates. In case such study is required regarding the future working capital position of the company, a projected funds flow statement can be prepared. The uses of a funds flow statement can be put as follows: i. It explains the financial consequences of business operations: Funds flow statement provides a ready answer to so many conflicting situations, such as: a. Why the liquid position of the business is becoming more and more unbalanced in spite of business making more and more profits? b. How was it possible to distribute dividends in excess of current earnings or in the presence of a net loss for the period? c. How the business could have good liquid position in spite of business making losses or acquisition of fixed assets? d. Where have the profits gone? ii. It answers intricate queries: The financial analyst can find out answers to a number of intricate questions: a. What is the overall creditworthiness of the enterprises? b. What are the sources of repayments of the loans taken? c. How much funds are generated through normal business operations? d. In what way the management has utilized the funds in the past and what are going to be likely uses of funds? iii. It acts as an instrument for allocation of resources: A projected funds flow statement will help the analyst in finding out how the management is going to allocate the scarce resources for meeting the productive requirements of the business. The uses of funds should be phased in such an order that the available resources are put to the best use of the enterprise. The funds should be managed in such away that the business is in a position to make payment of interest and loan installments as per the agreed schedule. iv. It is a test as to effective or otherwise use of working capital: Funds flow statement is a test of effective use of working capital by the management during a particular period. The adequacy or inadequacy of working capital will tell the financial analyst about the possible steps that the management should take for effective use of surprise working capital or make arrangement in case of inadequacy of working capital.
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