Difference between Cash Flow & Fund Flow: How Money Moves in a Business
In business, cash flow and fund flow are two important concepts for tracking how money moves through a company. While related, they measure different aspects of business finances.
Cash flow focuses on the actual cash going in and out of a business. Fund flow looks at the sources and uses of funds, which includes cash but also other liquid assets.
Understanding the difference between cash flow and fund flow is crucial for making sound financial decisions and ensuring adequate funding for operations.
Defining Cash Flow
Cash flow refers to the actual cash moving in and out of a business. It measures how much liquid cash is available at a given time to fund operations, invest, and pay expenses.
Specifically, cash flow looks at:
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Cash inflows – This includes cash received from revenues, sales, borrowing, owners’ investments, and any other cash received.
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Cash outflows – This covers cash paid out for operating expenses, payments on debt, asset purchases, dividends, and any other cash payments.
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Net cash flow - The difference between total cash inflows and total cash outflows over a period of time. Positive net cash flow means more cash is coming into the business than going out. Negative net cash flow means more cash is leaving than entering the business.
Knowing net cash flow is crucial for determining if a business has enough liquid cash to pay its obligations. Businesses track cash flow regularly through financial statements like cash flow statements and cash budgets.
Understanding Fund Flow
While related to cash flow, fund flow has a different focus. Fund flow tracks all sources of funds coming into a business and the uses of those funds going out over a period of time.
Along with cash, sources of funds can include the below:
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Liquidating assets – Converting inventory, investments, or other assets into cash inflows.
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Increasing liabilities – Taking on more debt or loans provides funding but also increases future obligations.
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Increasing owner equity – Funds invested by owners add to the total business funding.
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Decreasing assets – Selling off fixed assets like land, buildings, or equipment brings in cash.
Comparing cash flow vs fund flow
| Aspect | Cash Flow | Fund Flow |
|---|---|---|
Focus | Looks narrowly at cash inflows and outflows. | Looks broadly at all sources and uses of funds. |
Timing | Measures current cash availability. | Examines changes in longer-term funding over time. |
Scope | Includes only actual cash transactions. | Includes both cash and non-cash changes in assets and liabilities affecting funding. |
Liquidity | Measures immediate liquidity. | Assesses overall financial flexibility and resources. |
Sustainability | Indicates shorter-term solvency. | Helps identify longer-term funding weaknesses. |
Analysis | Analysed through financial statements like cash flow statements. | Examined via comparative balance sheets over time. |
Summary | Provides a short-term, tactical view of cash available. | Gives a strategic, long-term perspective on finances for operations and growth. |
Why Cash Flow and Fund Flow Both Matter
While measuring different aspects of finances, both cash flow and fund flow provide valuable, complementary information about a business’s financial condition.
Cash flow is critical for meeting day-to-day funding needs for operations and managing short-term liquidity. Extended negative cash flow can threaten the viability of a business. Fund flow highlights longer-term funding issues and provides a big picture view of how well the business is financially positioned for stability and growth.
Cash flow needs can often be addressed by improving longer-term fund flow, such as securing more financing. A business may have positive fund flow but still experience cash flow shortages, pointing to asset management problems.
Essentially, cash flow is about having enough funding on hand today, while fund flow is about having access to funding to operate in the future. Both perspectives are crucial for sound financial management.
Monitoring and managing both cash flow and fund flow over time allows businesses to -
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Avoid potential cash crunches before they become crises.
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Identify better ways to convert assets into usable cash.
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Make strategic investment and financing decisions.
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Determine if and when more funding is needed for growth.
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Assess if cash is being used effectively or tied up unproductively.
Thus, cash flow provides visibility into short-term cash availability while fund flow highlights longer-term financial flexibility. Tracking both ensures adequate funding today and financial health well into the future.
Understanding the difference between cash flow and fund flow provides critical insight into the financial health and soundness of a business. Analysing both consistently and comprehensively allows management to make smart financial decisions and take proactive steps to strengthen the business's current and future financial position.
FAQs
How often should a business monitor cash flow and fund flow?
Companies should keep a constant eye on cash flow, even on a daily basis, to ensure they maintain sufficient cash on hand to meet immediate requirements. Fund flow needs to be examined at least quarterly, if not monthly, to recognise any long-term funding concerns and trends. Increased frequency of fund flow analysis gives more visibility to make proactive adjustments rather than just identifying issues after the fact. Continuous monitoring of both enables companies to proactively manage finances.
What are some key ways to improve cash flow?
Optimising cash flow means maximising the window between outflows and inflows to prevent shortages. Techniques include speeding up collections of accounts receivable, stretching payments to suppliers where feasible, coordinating outflows to coincide with seasonal inflows, and shunning projects that need large initial cash outlays prior to the onset of inflows. Firms can also add cash by taking advance payments from customers, obtaining short-term funding, and disposing of excess stock or assets.
How does fund flow analysis inform strategic business decisions?
Fund flow analysis determines the most strategic applications for available funds, i.e., buying assets for increased growth compared to retiring high-cost debt. It also aids in decisions involving taking on finance, as heightened liabilities enhance fund flow but present repayment liabilities as well. Measuring fund flow sources and utilisation identifies investments providing the best return on funding put forth. Fund flow changes also show when growth may require further financing or if excess funds are to be used in other investments.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
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