A Funds-Flow Statement by the very definition is the statement showing the movement of funds in the organisation i.e. the sources and the uses of the funds available between two balance sheet dates. It is an important part of the financial statements of every organisation even though they prepare a thorough Balance Sheet.
While a balance sheet does state the assets and liabilities of the organization, it does have its limitations. It will not give you the information as to where the money came from and where it has been allocated as well the essential information about the timings of these funds, i.e. WHEN did the money come in and WHEN was it allocated. Hence, a fund flow statement is crucial from an organization point of view as well as from the investor point of view. Read on to know all about a Fund Flow statement.
Objectives of Fund Flow Statement
- Helps in knowing the changes in the company’s financial position
The main aim of preparing a fund flow statement is to cite the reasons for changes in the liabilities, assets, or equity capital. It is done by comparing the two balance sheets for different accounting periods.
- Analysing the operational position of the company
The balance sheet gives a static view of the company’s financial position. It is only an overview of the current position of the company at any particular date so a thorough review of the movement of funds is essential for better financial planning.
- Helps in proper allocating of the resources
Fund flow statement helps in providing information regarding the allocating of the resources more efficiently and effectively. It also gives information regarding external and internal sources of financing.
- To evaluate the financial withstanding of the company
The external and internal users of the financial statement require fund flow statements to assess the company’s strengths and weaknesses.
- Fund flow statement acts as a future guide
Fund flow statement reflects all details regarding the historical changes that have taken place in the company’s working capital and net assets in a particular accounting period. This in turn serves as a guide to make financial decisions to achieve the goals of the organization.
Format for Fund Flow Statement
The fund flow statement can be prepared in the vertical format as well as horizontal format. Given below is the horizontal format of the fund flow statement
|Sources of Funds||Application of Funds|
Funds generated from operations
Sale of assets (if any)
Excess usage of funds over sources.[Decrease in working capital]
Funds utilised in creation of Fixed assets
Funds utilised in repaying existing loans.
(Bal.fig) Excess of Funds over application of funds – [Increase in working capital]
Understanding Fund Flow Statement
Let us have a look at the following example to better understand fund flow statement:
BALANCE SHEET AS ON 31ST MARCH 2021
|Share Capital||500||Fixed Assets||850|
|Long term loans||300|
|Current Liabilities||250||Current Assets||500|
This balance sheet above gives the precise position of the entity as on the balance sheet date. However, it fails to provide any details of its particulars. For instance, it says the fixed assets of the organisation are to the tune of 850, but it does not provide any information if the said assets are newly purchased or have been in the organisation for long.
This is where a Funds-Flow Statement comes into picture. A balance sheet reflects the position of an organisation as on a day (be it the last day of the financial year or an interim period). A fund flow statement on the other hand is over a period of time. It shows the inflow and outflow of the funds over a period of time which is essentially between 2 balance sheets.
Let us consider the following two balance sheets, revealing the position of an organisation in the previous year and the current year:
|31st March 2020||Liabilities||31st March 2021||31st March 2020||Assets||31st March 2021|
|300||Share Capital||500||700||Fixed Assets||850|
|400||Long term loans||300|
|200||Current Liabilities||250||375||Current Assets||500|
Let us examine each figure on the liabilities and the assets side in order to determine if there has been an inflow or outflow of funds.
Uses of Fund Flow Statement
- Share Capital
The very first item on the liabilities side indicates an increase in the owner’s funds, i.e., the Share Capital. An increase in the Share Capital can only be in the case of a fresh issue of shares which here is to the tune of 200. This is a source of the funds for the organisation hence will appear on the sources side of the Funds-Flow Statement.
- Reserves and Surplus
Next comes the Reserves and Surplus also having an increase of 125 between the two balance sheet dates. This reflects the retained profits of the organisation which is another source of funds and will appear on the sources side of the Funds-Flow Statement.
- Long Term Loans
Moving on, the third item on the Balance Sheet is the Long Term Loans. It shows a decrease in the amount by 100 which can be on account of repayment. This indicates a use of the available funds and hence will be reflected on the uses side of the Statement.
- Fixed Assets
The first item on the Assets side of the Balance Sheet shows an increase in the value of the fixed assets. This indicates a fresh purchase of an asset in the current year and thus will be reflected in the uses side of the Funds-Flow Statement.
- Current Assets and Current Liabilities
The remaining items on the Balance sheet namely the Current Assets and the Current Liabilities have to be looked at together to get a clear picture regarding the working capital of the organisation. The changes in the working capital also indicate an allocation of the funds available and therefore, a typical Funds-Flow Statement also includes a Statement Showing Change in Working Capital.
STATEMENT SHOWING CHANGE IN WORKING CAPITAL
|Particulars||31st March 2020||31st March 2021|
|(-) Current Liabilities||200||250|
|Net Working Capitals||175||250|
|Increase in Working Capitals||75|
The increase in the working capital by 75 shows that the organisation has allocated more money in the working capital and hence this will reflect on the uses side of the Funds-Flow Statement.
Let us now prepare a Funds-Flow Statement for this organisation based on the information derived from the above two Balance Sheets.
|Fresh Issue of Shares||200||Repayment of loans||100|
|Retained Earnings||125||Purchase of Fixed Assets||150|
|Increase in Working Capital||75|
The above statement indicates that while the closing balances of the two years may be 1075 and 1350, the actual flow of funds during the period is to the tune of 325.
The said inflow of 325 is on account of a fresh issue of shares and through retained earnings. However, the same is not reflected as a direct increase in the cash or bank balance of the entity. The uses side of the Statement indicates the areas of allocation of the said funds raised.
This enables the management to track all the funds that have come in and gone out of the organisation.
Another key feature of a financial statement of any organisation is the Cash Flow Statement. It focuses on the actual inflow and outflow of cash from the organisation. It is mainly used to determine the liquidity position of the organisation and thus identify any liquidity problems, if any.
A Funds-Flow Statement on the other hand deals with the long-term nature of the funds, its application as well as the position of the working capital and its impact on the organisation. This further determines the financial situation of the entity and enables a correct allocation of its funds. It is a crucial factor leading to healthy financial planning.
How do fund flow analysis help investors?
The fund flow analysis is a great help for potential investors in deciding whether the company can manage the funds properly or not. Investors will be able to estimate the creditworthiness of the company as well as decide how safe it is to invest in that particular company. The management of the organization is also benefited through the fund flow statements as it will help in an efficient decision-making process to optimize the resources of the company to ultimately maximize the profits.
FAQs on Fund Flow Statement
Cash flow statement is prepared to analyse the movement of purely cash and cash equivalents of the organization while fund flow statement is used to prepare the overall movement of all the funds of the entity.
Nowadays, most businesses are making use of SERP software or online accounting software for preparing fund flow statements along with other forms of financial statements. It makes it easier for business owners to get accurate financial information for analysis and making smart business decisions.
The basic reasons for changes in working capital of any organization are,
– Issue or redemption of shares and debentures
– Purchase or sale of current assets or fixed assets
– Income from different sources
– Payment of Miscellaneous expenses
– Extension of credit period to the debtors or creditors
– Payments of Dividends
No. Capital assets are also known as capital investments which are for meeting the long term goals of the organization. Hence, they have to be financed with a long term loans to avoid falling into a vicious cycle of getting more loans to pay off existing debts.