What is a Fund Flow Statement? How to Prepare, Meaning, Objectives & Examples

A Funds Flow Statement is a crucial financial document that helps businesses track and analyse the movement of funds within a given period. It showcases the sources of funds and their utilisation, enabling organisations to make informed financial decisions.

What is a Funds Flow Statement?

A Funds Flow Statement examines the variations in a company’s financial position from one accounting period to another. It shows inflows and outflows of funds and aids in understanding the reasons behind the financial variations. Unlike the balance sheet or profit and loss account, which gives a static view of the assets and liabilities, a funds flow statement details how and why these variations arise.

Types of Financial Inflows

The sources of funds in a company can be classified into two major categories:

1. Long-Term Funds – Raised from:
   • Sale of fixed assets
   • Issuance of shares, bonds, or debentures
   • Long-term borrowings from financial institutions
2. Funds from Operations – Cash inflows generated through business activities

A company’s long-term financial requirements can only be met by long-term funds. If operational cash flows are insufficient to meet financial obligations, it may result in a shortfall in working capital.

Objectives of a Funds Flow Statement

A funds flow statement serves several purposes, including:

• Understanding Financial Changes: It helps analyse the reasons behind shifts in financial positions.
• Evaluating Liquidity and Solvency: It provides insights into how well a company can meet its short-term obligations.
• Tracking the Use of Funds: It identifies where funds are invested or spent.
• Aiding Financial Planning: Helps management strategise future investments and resource allocation.
• Assessing Creditworthiness: Financial institutions use it to evaluate a company’s repayment capacity.

Components of a Funds Flow Statement

A Funds Flow Statement consists of two key sections:

1. Sources of Funds (Where money comes from):
   • Owners’ equity (capital infusion)
   • External borrowings (debentures, bank loans)
   • Sale of assets (machinery, land, buildings)
   • Profits retained from operations
2. Application of Funds (Where money is used):
   • Investments in fixed assets (new plants, buildings)
   • Increase in current assets (inventory, accounts receivables)
   • Loan repayments and dividend distribution
   • Increase in working capital

Preparation of a Funds Flow Statement

Understanding the flow of funds within an organisation is crucial for effective financial planning and decision-making. A Funds Flow Statement provides insights into the movement of financial resources, helping businesses analyse how funds are generated and utilised over a specific period.

To prepare a Funds Flow Statement, follow these key steps:

Step 1: Prepare a Schedule of Changes in Working Capital

• Compare current assets and liabilities between two balance sheet periods.
• An increase in current assets or a decrease in current liabilities leads to a rise in working capital.
• Conversely, an increase in current liabilities or a decrease in current assets reduces working capital.

Step 2: Calculate Funds from Operations

• Adjust net profits for non-cash expenses like depreciation, amortisation, and loss on asset sales.
• Remove non-operating incomes, such as profit from asset sales.

Step 3: Prepare the Funds Flow Statement

• List all sources and applications of funds.
• Ensure the total sources match the total applications.

Example of a Funds Flow Statement

Company ABC Ltd. – Funds Flow Statement for the Year 2025

The company maintains a balanced fund flow since the total sources and applications match.

Benefits of a Funds Flow Statement

A Funds Flow Statement is a crucial financial tool, offering valuable insights into an organisation’s financial movements and overall stability.

1. Assessment of Financial Health: It gives an overview of an organisation’s liquidity position and facilitates financial performance
2. Effective Resource Allocation: As companies have limited resources, this statement helps make informed decisions regarding investment priorities.
3. Strategic Decision-Making: It assists management in making policies on:

• Distribution of dividends
• Capital spending
• Loan repayment policies

4. Enhanced Credit Ratings: Banks and financial institutions utilise Funds Flow Statements to evaluate an enterprise’s financial stability before lending.

Limitations of a Funds Flow Statement

While useful, the Funds Flow Statement has certain drawbacks:

• Not a Substitute for Financial Statements: It is not a substitute for a balance sheet or profit and loss
• Lack of Cash Flow Details: It does not include detailed cash transactions,which requires a Cash Flow Statement.
• Historical Data Only: It only covers past transactions, and thus, it is not that predictive
• Can Be Misleading: The statement may not reflect the financial situation if financial data is inaccurate.

Funds Flow Statement vs. Cash Flow Statement

Final Thoughts

A Funds Flow Statement is an important tool for financial analyst. It gives the company financial movements and helps the stakeholders know how funds are raised and used. It does not replace the balance sheet or cash flow statement but supplements them in long-term financial planning. By understanding this statement, funds can be effectively converted into working capital, resources can be allocated more efficiently, and overall financial stability can be improved.