If you are analysing a company’s financial performance in India, you might want to know how the money flows in and out of the business over time. Fund flow statement is an important financial statement which displays the sources and uses of funds for two accounting periods.
It tells you exactly where the money came from, and exactly where it went. This provides business owners and analysts with a clear image of how a company is managing its working capital. It’s a great tool to see the financial changes from one financial year to the next.
Key Takeaways
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A fund flow statement tracks the movement of funds between two specific accounting periods.
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It highlights how a business raises money and how it uses that money in its operations.
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The statement is essential for understanding changes in the working capital of an organisation.
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It helps business owners, investors and banks make better financial and lending decisions.
Fund Flow Statement Meaning
Before understanding the fund flow statement meaning we need to understand the words “fund” and “flow” within accounting. The word fund here means the working capital with which to do business. Working capital is the money a company uses to fund its day-to-day operations. It is calculated by subtracting current liabilities from current assets. The term “flow” refers to the movement or change in these funds over time.
So, what is a fund flow statement? It is a structured report that explains the reasons behind the changes in the financial position of a company. It focuses specifically on how working capital increases or decreases during a given financial year. If a company raises more funds than it uses, its working capital increases.
Also Read About: Funds and Investments
Objectives of Fund Flow Statement
Businesses prepare a fund flow statement for a few very important reasons. The main objective is to understand the exact changes in the financial position of a company between two balance sheet dates. It clearly points out the various sources from which funds were generated during the year. It also highlights the specific uses or applications of those newly generated funds.
This helps the management team see if short term sources were used to buy long term assets. Doing so can be a risky financial move. By meeting these objectives, the management can plan their future financial strategies more effectively and safely.
Components of a Fund Flow Statement
To build and read this statement correctly, you need to understand its main parts. The statement generally relies on a schedule of changes in working capital and the actual movement of funds. The movement is divided into two major sections.
1. Sources of Funds
This component lists all the different ways a company brings in money. It includes issuing new equity shares, taking long term bank loans, selling fixed assets like land or machinery and the funds generated from normal business operations. Any activity that increases the working capital is recorded here.
2. Applications of Funds
This section shows exactly how the company spent the money it raised. Common applications include buying fixed assets for expansion, repaying old bank loans, paying out dividends to shareholders and covering any net losses from daily operations. Any activity that decreases the working capital is listed in this section.
Also Read About: Cash Flow Statements and How to Read them
How to Prepare a Fund Flow Statement
Preparing this statement involves a logical step by step process.
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You must create a schedule of changes in working capital. You do this by comparing the current assets and current liabilities from two consecutive balance sheets. This step tells you the net increase or decrease in working capital.
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You need to calculate the funds from operations. This step requires you to adjust the net profit by adding back non cash expenses like depreciation and removing non operating incomes.
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You identify all other sources and applications of funds. You do this by looking at changes in long term assets and long term liabilities on the balance sheet.
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Finally, you put everything together in the final format. You match the total sources against the total applications to see if it matches the net increase or decrease in working capital found in the first step.
Example of Fund Flow Statement
Let us look at a simple numerical example for an imaginary Indian company called ABC Private Limited for the financial year ending 2023.
|
Sources of Funds |
Amount (₹) |
Applications of Funds |
Amount (₹) |
|
Funds from Operations |
5,00,000 |
Purchase of Machinery |
3,00,000 |
|
Issue of Share Capital |
2,00,000 |
Repayment of Bank Loan |
1,50,000 |
|
Sale of Old Building |
1,00,000 |
Payment of Dividends |
50,000 |
|
|
|
Net Increase in Working Capital |
3,00,000 |
|
Total |
8,00,000 |
Total |
8,00,000 |
In this simple example, the company generated a total of ₹8,00,000 from its daily operations, issuing shares and selling an old building. They applied these funds to buy new machinery, repay a bank loan and pay dividends to their shareholders. This used up ₹5,00,000. The remaining balance of ₹3,00,000 represents a net increase in the working capital for the business.
Uses of Fund Flow Statement
This financial document is highly useful for various stakeholders in the market. The management team uses it to evaluate their financial policies and plan future business growth. If the management wants to expand operations across India, this statement shows if they have enough working capital to support that massive expansion.
Investors use it to see if the company is using its funds wisely and if it has the capacity to pay regular dividends in the future. Financial analysts and banks look at this statement to judge the long term solvency and overall financial health of the business before approving large corporate loans.
How to Analyse a Fund Flow Statement
Analysing the statement gives deep insights into the financial strategy of a company. First, you should assess the changes in working capital. A steady increase means the company is maintaining healthy liquidity to pay its everyday bills.
Next, you must identify the major funding sources. If a company relies too heavily on borrowing money, it might face high interest costs soon. Finally, evaluate how the funds were deployed. Money spent on new machinery is usually a very good sign because it indicates future growth. However, using long term loans to pay for daily operations is a major warning sign of poor financial management.
Fund Flow Statement vs Cash Flow Statement
People often confuse these two important financial reports. Here is a clear comparison table to show the main differences.
|
Feature |
Fund Flow Statement |
Cash Flow Statement |
|
Meaning |
Shows the movement of working capital. |
Shows the actual inflow and outflow of cash. |
|
Focus |
Focuses on broader financial resources. |
Focuses purely on cash and cash equivalents. |
|
Working Capital |
Includes all current assets and current liabilities. |
Only looks at actual cash balances. |
|
Purpose |
Helps in long term financial planning. |
Helps in short term cash management. |
|
Reporting |
Compares balance sheets from two distinct periods. |
Tracks daily or monthly cash movements. |
|
Usage |
Used mainly for internal management analysis. |
Widely used by investors and mandatory for many companies. |
Read More About: Difference Between Cash Flow and Fund Flow
Advantages and Limitations of Fund Flow Statement
Advantages
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Highlights exactly how a company finances its growth.
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Shows how the business uses its available financial resources.
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Connects the gap between the profit and loss account and the balance sheet by clearly explaining the movement of funds.
Disadvantages
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Relies on historical data, meaning it only looks at the past and does not reflect the current reality of the market.
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Has a limited focus compared to cash flow analysis because it ignores the actual cash position of the business.
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Creates a situation where a company might show a positive fund flow but still face a critical shortage of hard cash to pay its suppliers.
Conclusion
A fund flow statement is a very important concept for anyone in finance or business management. It gives a very detailed picture of the way in which working capital moves between two accounting periods.
By looking closely at how the money comes in and where it goes, companies can make better long-term decisions. Despite some limitations in terms of cash visibility, it is still a very valuable tool to check the overall financial stability and growth potential of an organization.
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