Fund Flow Statements with examples-prepare in easy way

You track your income and expenses to know where your income vanishes by the end of the month. Basically, understanding how much and for what purposes the money was consumed, makes you more cautious of blowing it off the next time. Managing funds is an uphill task for an individual as well as for a business. Thus, a business enterprise would definitely want to track the inflows and outflow of its funds. This gives more visibility to the management to understand its working capital requirement, cash needs, liquidity position, and financial health of the business. Fund Flow Statements are the answer to the above problems. Let us study fund flow statements in detail.

What are Fund Flow Statements?

Fund Flow Statements summarize the inflow and outflow of the firm’s funds. It gives a clear understanding of sources of funds, as to where the funds come from and where they go. Fund Flow Statements are extremely useful for comparing balance sheets of 2 financial years to track the inflow and outflow of funds. This helps in revealing the factors driving the changes in the financial position of the firm from one financial year to another. Though it is not a mandated requirement as per compliance but preparing fund flow statements ends up revealing a lot about the financial health and performance of the company. It will improve the decision-making process for the management as strategies may be formulated after deep-diving into this statement’s insights.

Need for Fund Flow Statements

Fund Flow analysis reveals a lot of underlying information about any business. Below are the reasons for preparing fund flow statements while it is not mandated by law:

• Working capital requirement

Fund flow Statements give an exact amount of working capital required to meet the firm’s current obligations. Working Capital =Current Assets – Current Liabilities. The way the fund flow statements are prepared reveals whether working capital is sufficient when the source of funds is higher than the application of funds. When working capital is a deficit it means that the source of funds is lesser than the application of funds. This gives a clear indication of taking corrective measures to ensure the maintenance of optimal working capital.

• Liquidity management

Reveals whether the firm has sufficient liquid funds to meet any contingencies or uncertainties or not. Having sufficient liquidity boost a firm’s crisis management capabilities thus making it easy for it to sail through difficult times.

• Planning budgets

Knowing the sources and application of funds makes it easier for the firm to anticipate its expenses as well as income in the future. Budget preparation becomes easy and more accurate with lesser variances in forecasted values compared to the actuals. Pre-planning helps in allocating resources optimally.

• Comparing two financial years

Fund flow statements help you to compare year on year financial position of the firm. This reveals a lot about what went wrong or right. It reveals whether the financial position has improved or deteriorated year on year.

• Determine dividend payment

To determine whether surplus funds could be distributed as dividends to the shareholders, fund flow statements are relied upon. As maximizing share holder’s wealth is the foremost objective of any business.

Format of Fund Flow Statement

Fund Flow is prepared as follows with 2 columns one as Sources of Funds and the other as Application of Funds. All the items under Sources of Funds are listed underneath the heading. The same holds true for the Application of funds.

Items recorded:

Let us first discuss the items listed under Sources of Funds:

• Funds from operations – These are cash flows from operating activities. These activities are carried out as part of the core business.
  • Sale of Investments – Investments in other companies is sold out to get funds.
  • Sale of Fixed assets – Fixed assets like building, plant when sold.
  • Sale of Shares or Debentures – Issue of shares or debentures creates inflow of funds.

Let’s now discuss the items listed under Application of Funds:

• Purchase of fixed assets – Fixed assets like machinery, or office land when bought, leads to cash outflow.
  • Purchase of Investments – Investing in shares of other companies.
  • Redemption of Shares or Debentures – Pay out the funds by redeeming the shares or debentures as per agreement.
  • Payment of Dividends and taxes – making regular tax payments and dividends to the shareholders in case of surplus profits.

Examples of Fund Flow Statements:

Below is the format of the fund flow statements along with the calculations explained in detail:

• Total from Sources of Funds = Rs 215,000.
• The total of Application of Funds excluding the increase in working capital is Rs 211,000.
• Increase in working capital = Total Sources of Funds – Total Application of Funds

                                                                = Rs 215,000 – Rs 211,00

                                                                = Rs 4000/-

Thus Rs 4000/- is the derived value treated as an increase in working capital since the Sources of Funds were higher than the Application of Funds.

Difference between Cash Flow and Fund Flow Statements

Though Cash flow Statements and Fund Flow Statements sound alike, as cash denotes funds and vice versa, these 2 statements are indeed different from each other. Let us discuss their differences below:-

What is Cash Flow and Fund Flow Analysis:

Cash Flow Analysis

Cash Flow Statements help in populating 3 types of inflow of cash. These are cash flow from operations or core business of the company, cash flow resulting from investing activities of the company, and cash flow accruing from the financing activities of the company. Analyzing cash flows through cash flow statements helps in reviewing the current cash position of the company.

If the Cash position is good then net cash flow will be positive. However positive net cash flow does not necessarily guarantee the financial stability of the company. As it is possible that either of the above 3 cash flow activities is negative, yet 2 are positive, thus making the net cash position positive or there could be other probabilities as well. Cash Flow analysis helps in understanding below business aspects:

• Whether a company is making profits out of its core business
• If cash flow from investing activities is negative, then take wise investment decisions for future
• If cash flow from financing activities is negative then, manage finances more cautiously
• Year on year net cash flow trend should help to decide on the management decisions

Fund Flow Analysis

Fund Flow Statements helps to determine the sources of funds and application of funds. It is also helpful in comparing the financial position year on year. Fund flow analysis is the answer to questions like Where are the funds utilized and How important it is for any business as well as the management to make critical decisions? Fund Flow analysis helps in understanding below aspects of business:

• To know the sources of funds as to where the funds came from
• To know for what purpose were the funds utilized
• Understand the working capital requirements of the company
• If there is an increase in working capital, then the company does not need to be worried about how to finance working capital needs
• If there is a decrease in working capital, then the company has to bother about financing its working capital. It has to look for short-term and long-term sources of financing working capital.
• It helps to reveal the financial position of a company along with its financial stability and liquidity position.

FunFact:

It is the 32^nd anniversary of the statement of cash flows when they were mandated as part of the financial statements.

Let us know if you were able to prepare fund flow statements?