Cash Flow vs Fund Flow: Key Differences Every Finance Student Should Know

When analysing a company’s finances, one key question often comes up: where is the money going? That’s where cash flow and fund flow statements come into play. While both track how money moves, they focus on different areas—cash flow deals with immediate liquidity, whereas fund flow captures long-term changes in working capital.

This blog delves deeper into the cash flow vs fund flow debate. It explains the key differences between the two and how each is used to assess a company’s financial health.

What is cash flow?

Cash flow refers to the movement of money in and out of your business or personal finances. It shows how much cash is available at any given time. Positive cash flow means more money is coming in than going out, while negative cash flow indicates the opposite. It is vital for daily operations and long-term financial health.

Types of activities in a cash flow statement

The three different types of activities in cash flow statements are:

1. Operating activities

Operating activities reflect the cash generated or spent from a company’s core business functions. This section adjusts net income for non-cash items like depreciation and changes in working capital. It captures cash inflows from customer receipts and outflows for vendor payments, salaries, rent, and taxes. Importantly, this part helps investors evaluate whether the business can generate enough cash to sustain operations without relying on external funding. Consistent positive cash flow from operating activities often signals a healthy and self-sustaining business model.

2. Investing activities

Investing activities include cash movements from purchasing or selling long-term assets and investments. This section shows how much a company spends on physical assets like property, plant, and equipment or earns from selling them. It also includes cash used in or received from mergers, acquisitions, or the sale of subsidiaries. A high cash outflow in this section indicates that a business is expanding, while inflows may suggest asset liquidation. This information is useful in understanding the company’s growth strategy and asset management efficiency.

3. Financing activities

Financing activities report cash flows related to the company’s capital structure changes. This involves issuing shares, borrowing or repaying loans, and paying dividends. For example, proceeds from issuing equity or debt appear as inflows, while repayments, buybacks, and dividend payouts are outflows. This section reveals how a company funds its operations and growth through debt, equity, or internal reserves. A pattern of heavy borrowing or frequent equity issuance may raise questions about long-term financial stability or ownership dilution.

A step-by-step guide to preparing a cash flow

Here is how you can prepare a cash flow:

• Step 1: Begin by noting the opening cash and cash equivalents from the start of the period.
• Step 2: Use the indirect method by starting with net profit. Adjust it for non-cash items like depreciation and changes in working capital (like receivables and payables).
• Step 3: Next, record cash used in or earned from investing, such as buying or selling fixed assets, property, or investments.
• Step 4: Then include inflows from loans, issuing shares, or outflows like loan repayments, dividend payments, or share buybacks.
• Step 5: Add all three sections, operating, investing, and financing, to calculate the net increase or decrease in cash.
• Step 6: Add the net cash flow to the opening balance. This gives you the closing cash balance for the period.

What is fund flow?

Fund flow refers to the movement of funds in and out of a business over a specific period. It shows how a company raises and uses its financial resources, focusing on long-term sources and applications of funds. Unlike a cash flow statement, fund flow highlights changes in working capital and helps understand a firm’s financial stability, investment decisions, and overall financial planning.

A step-by-step guide to preparing a fund flow

Here is how you can prepare a fund flow:

• Step 1: Begin by collecting the balance sheets of the current and previous years.
• Step 2: Prepare a statement showing the increase or decrease in current assets and current liabilities to find the change in working capital.
• Step 3: Look for increased non-current liabilities and equity items. These include loans raised, shares issued, or fixed asset sales.
• Step 4: Note the uses of funds, such as purchasing fixed assets, repaying loans, or paying dividends.
• Step 5: Use the formula: Fund from Operations = Net Profit + Non-cash expenses – Non-operating incomes.
• Step 6: Finally, create the fund flow statement by listing all sources and applications of funds, ensuring the total matches.

Difference between cash flow and fund flow

The key difference between a cash flow statement and a fund flow statement is as follows:

Conclusion

Understanding the difference between cash flow and fund flow is essential for every finance student. Cash flow focuses on the actual movement of cash in daily operations, while fund flow tracks the changes in working capital and long-term finances. Both provide valuable insights into cash flow for short-term liquidity and fund flow for overall financial health. Together, they help businesses manage money effectively and make informed financial decisions.

Sources

Khatabook
HDFC Sky