What Is a Fund Flow Statement?

Key Highlights

• A fund flow statement is a document that covers the inflows and outflows of funds.
  
• The funding sources and the use of funds in a given period are included.
  
• This helps analyse the change in a company's finances.
  

Understanding a Fund Flow Statement

Wondering what is a fund flow statement? To verify the transfer of funds from the previous financial year to the current financial year, a funds flow statement is a financial document, which analyses a company's balance sheet for two years. It assesses the source of inflows and outflows during the relevant accounting period, as well as analyses their impact on the working capital of an organisation.

It is one of the critical indicators that shows how funds are used. Finance analysts are able to evaluate the fund flow of an organisation in due course with the help of this statement. It is also known as the application of the Funds and the Statement of Sources, as this statement describes the movement of funds between different sources and their applications.

What Is Fund Flow Statement Analysis?

Fund flow statement analysis is often used to understand changes in a company's financial situation. Like cash flow statement analysis, fund flow statement analysis examines financial information, including the balance sheet and income of the business. The majority of companies use a mix of three main accounting statements to analyse their finances and operations.

1. Balance sheet
All the assets, liabilities and capital accounts are summarised with their current balances reflecting a specific period.

2. Profit and Loss/Income statement
The profit and loss or income statement summarises the revenue, costs and profit or loss for a given period.

3. Cash flow statement
For a specific time, cash inflows and outflows from operating activities, investment activities or financial activities will be assessed by examining cash inflows and outflows, which are most comparable to the fund flow statement.

Objectives of Fund Flow Statement

The primary objectives of the fund flow statement are as follows:

1. An analysis of the company's operating situation

The balance sheet provides an overview of the company's finances constantly. This report provides an overview of the company's situation at any given time. Hence, it is essential to undertake a detailed examination of funds movements to improve corporate finance planning.

2. Help to notify the company of changes in its financial position

A statement of reasons for changing the assets, liabilities or equity capital is essential in preparing a fund flow statement. This is based on comparing the two balance sheets for different accounting periods.

3. Help to optimally allocate resources

To make more efficient and effective use of resources, the financial flow declaration helps provide information on resource allocation. It also includes information on the source of financing from abroad and internal sources.

4. To assess whether the company is financially stable

Fund flow statements are required to determine the strengths and weaknesses of the company, particularly from a financial standpoint.

The fund flow statement also reflects all details relating to the historical changes in the company's working capital and assets in a particular accounting period. Therefore, it is an instrument for making budgetary decisions to meet the organisation's objectives.

Importance of the Fund Flow Statement

The importance of the fund flow statement is as follows.

1. Financial situation

The reasons for a company's financial position change are not explained by its profit and loss statement or balance sheet. The fund flow statement, in fact, provides details regarding the source of funds and their utilisation.

2. Company Analysis

Sometimes, even companies that make profits face a cash crunch. A fund flow statement helps identify where the money is coming from and where is it tied up, giving a clear picture of how the firm is managing its funds.

3. Management

The statement of financial flows is a tool for management to make better decisions by showing how funds are being used. It also acts as a tool for keeping financial activities in check and maintaining control over the company’s finances.

4. Changes in assets and liabilities

Between the two balance sheet dates, the statement shows the reason for the change in assets and liabilities. Therefore, an in-depth analysis of the balance sheet can be performed.

5. Creditworthiness

This company statement is used by lending institutions to assess its creditworthiness. The statements are compared against each other over several years to approve a loan. As a result, the statement shows the company's credibility as a fund manager.

6. Operational efficiency

Undertaking constant fund flow analysis also helps identify leaks, inefficiencies, and underutilised assets., thus assisting firms to make decisions that are in line with their projections or goals.

What Are the Components of a Fund Flow Statement?

A fund flow statement consists of key components, including:

• Sources of funds: Identifies where the funds come from, such as borrowing or issuing shares.

• Application of funds: Describes how the funds are used, including investments, asset purchases, or paying liabilities.

• Working capital changes: Tracks the changes in a company’s working capital over the period.

• Net change in funds: Shows the overall increase or decrease in funds during the period.

By understanding these components, you can gain a clearer picture of how your company is managing its finances.

The statement helps you identify the areas where funds are being generated and utilised. It gives you a better understanding of the company’s financial health, guiding future decisions and improving your overall financial strategy.

How to Prepare a Fund Flow Statement?

An organisation must take several steps to prepare a financial flow statement, as mentioned below.

Step 1

A schedule of working capital changes will be created. Consider how the current liabilities and existing assets have changed over time. In addition, note that the difference between current assets and liabilities determines net working capital change.

Step 2

To determine the Funds from Operations, you should prepare an adjusted P&L account. This relates to the amounts a company spends and earns in its regular business course rather than investment or financing activities. Several adjustments to the corporation's annual profit are made. They add noncash costs such as amortisation and depreciation. After the deduction of any gain on the sale of investments and fixed assets, the actual funds generated from operating activities will also be calculated.

Step 3

You must specify inflows and outflows to create a flow statement on the fund. The balance sheet should also be used to determine the source of funds or directional growth or contraction of its use to generate a fund flow statement. Any net change in working capital or funds from operations will also be included when the information is completed.

How to Read the Fund Flow Statement?

To understand a fund flow statement, it is important to break it down into its key parts and analyse what each section reveals about the company’s financial movements.

Step 1

Start by reviewing the schedule of changes in working capital. This shows how current assets and current liabilities have changed over the reporting period. A rise in working capital suggests more funds were used, while a drop indicates funds were freed up.

Step 2

Examine the funds from operations. This shows how much money the business generated from its core activities. Adjustments for non-cash expenses (like depreciation) or non-operating gains/losses help you see the real cash generated.

Step 3

Look at the sources and applications of funds. This tells you where the company got its money from (like issuing shares or selling assets) and how that money was used (like buying equipment or repaying loans). It helps assess whether the business is funding growth through internal profits or external borrowings.

How Does a Fund Flow Statement Differ from a Cashflow Statement?

To better understand the differences between the fund flow statement and the cash flow statement, it is helpful to compare their key aspects.

How Does Fund Flow Analysis Help Investors?

In assessing whether a company can manage funds properly, fund flow analysis can be an excellent tool for prospective investors. Investors will then be able to estimate the company's creditworthiness and decide whether it is safe to invest in that particular company. Fund flow reports are also beneficial for the organisation's management, as they help in an effective decision-making process, enabling the company to optimise its resources and ultimately maximise profits.

Limitations of a Fund Flow Statement

The statement has the following limitations, although its significance for analysing a company's balance sheet is significant.

1. This statement is focused only on the movement of funds. Other parameters included in the balance sheet, profitability, and loss accounts are not considered. It is therefore necessary to analyse it in conjunction with the balance sheet and the profit and loss account.

2. The fund's flow statement does not show the company's cash position. A separate report on cash flows needs to be prepared to analyse cash position.

3. A fund flow statement is better suited for understanding long-term financial movements. It may not provide a clear view of short-term liquidity or day-to-day financial operations, which are important for immediate decision-making.

Conclusion

A well-structured fund flow statement helps track how a company's working capital has changed between two balance sheet dates. It serves as a valuable tool for management to assess financial movements and make informed decisions. However, because it focuses only on fund-related activities, it should be used alongside other financial statements for a complete and accurate view of the firm’s financial health.