FUND FLOW

STATEMENT
BCOM(HONORS) PROGRAMME
PURPOSE OF FFO
 1. Identifying Sources and Uses of Funds:
 Cash Flow Analysis: It helps in understanding where the money is coming from and how it's being utilized. It
shows whether funds are from operations, financing, or investing activities.
 2. Financial Position:
 Working Capital Management: It reveals changes in working capital, which is crucial for a company's day-to-
day operations.
 Assessing Liquidity: It aids in evaluating a company's ability to meet short-term obligations by looking at
changes in current assets and liabilities.
 3. Capital Structure Analysis:
 Funding Mix: It shows changes in the composition of the capital structure, indicating how much comes from
equity, debt, or retained earnings.
 Debt Servicing Capacity: This helps understand a company’s capacity to service its debts and obligations by
analysing funds allocated to debt repayment.
 4. Understanding Investment Activities:
 Capital Expenditures: Reveals how much is being invested in assets and how these investments are funded.
 Asset Management: Analyzing the movement of funds in and out of investments helps in assessing the
company’s asset management strategies.
 5. Comparison Over Time:
 Trend Analysis: It helps compare fund flow statements over different periods to identify changing trends in a
company's financial activities.
 6. Diagnostic Tool:
 Identifying Financial Health: An in-depth analysis helps in assessing the financial health of a company,
understanding if it's growing, struggling, or maintaining stability.
 7. Decision Making:
 Assisting Investment Decisions: Investors and stakeholders can use the fund flow statement to make informed
decisions regarding investing in or lending to the company.
 8. Regulatory Compliance:
 Meeting Reporting Requirements: For public companies, a fund flow statement might be required for regulatory
compliance.
MEANING
 Funds Flow Statement is a statement prepared to analyse the reasons for
changes in the Financial Position of a Company between 2 Balance
Sheets. It shows the inflow and outflow of funds i.e. Sources and
Applications of funds for a particular period. In other words, a Funds
Flow Statement is prepared to explain the changes in the Working Capital
Position of a Company. There are 2 types of Inflows of Funds:-

 Long Term Funds raised by Issue of Shares, Debentures or Sale of Fixed

Assets
 Funds generated from Operations
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 If the Long Term Fund requirements of a company are met just out of
the Long Term Sources of Funds, then the whole fund generated from
operations will be represented by an increase in Working Capital.
 However, if the Funds generated from Operations are insufficient to
bridge a gap of Long long-term fund Requirements, then there will be
a decline in Working Capital.
 DIFFERENCE BETWEEN FFS AND CFS
 Funds Flow Statement is based on the Accrual System of Accounting. However, in
case of Cash Flow Statement – only the transactions effecting Cash or Cash
equivalents are taken into consideration
 Funds Flow Statement analyses the Sources and Application of Funds of Long
Term nature and the Net Increase or Decrease in Long Term Funds will be
reflected on the Working Capital of the firm. The Cash Flow Statement only
considers the Increase or Decrease in Current Assets or Current Liabilities in
calculating the Cash Flow of Funds from Operations
 Funds Flow Statement is more useful for Long Term Financial Planning. Cash
Flow Analysis is more useful for identifying and correcting the liquidity problems
of the firm.
 Funds Flow Statement tallies the funds generated from various sources with
various uses to which they are put. Cash Flow Statement starts with the Opening
Balance of Cash and reaches to the Closing Balance of Cash.
 Funds Flow Statement is useful for Long Term Analysis. It is a very useful tool in
the hands of the management for judging the financial and operating performance of
the Company. The Balance Sheet and the Profit and Loss A/c (Income Statement)
fail to provide the information which is provided by the Funds Flow Statement i.e.
Changes in Financial Position of an enterprise. Such an analysis is of great help to
the management, shareholders, creditors etc

 1. The Funds Flow Statement helps in answering the following questions:-

 Where have the profits gone?

 Why is there an imbalance existing between liquidity position and profitability
position of an enterprise?
 Why is the concern financially solid in spite of losses?
 2. The Funds Flow Statement analysis helps the management to test whether the working capital has
been effectively used or not and the working capital level is adequate or inadequate for the
requirements of the business. The Working Capital Position helps the management in taking policy
decisions regarding payment of dividend etc.

 3. The Funds Flow Statement Analysis helps the investors to decide whether the company has
managed the funds properly. It also indicates the Credit Worthiness of a company which helps the
lenders to decide whether to lend money to the company or not. It helps the management to take
policy decisions and to decide about the financing policies and Capital Expenditure for the future.
 The term "Fund" refers to Cash, to Cash Equivalents or to Working
Capital and all financial resources which are used in business. These total
resources of a concern are in the form of men, materials, money, plant
and equipment and others.

 In a broader meaning the word "Fund" refers to Working Capital.

 The Working Capital indicates the
difference between current assets and current liabilities.
 The term working capital may be :
(a) Gross Working Capital and
(b) Net Working Capital
 "Gross Working Capital" represents total of all Current Assets.
 "Net Working Capital" refers to excess of Current Assets over Current
Liabilities.
 In a narrow sense the word "Fund" denotes cash or cash equivalents.
 MEANING OF FLOW OF FUNDS
 The term "Flow of Funds" refers to changes or movement of funds or changes in
working capital in the normal course of business transactions.
 The changes in working capital may be in the form of inflow of working capital or
outflow of working capital. In other words, any increase or decrease in working
capital when the transactions takes place is called as "Flow of Funds.“
 If the components of working capital results in increase of the fund, it is known as
Inflow of Fund or Sources of Fund.
 Similarly, if the components of working capital effects in decreasing the financial
position it is treated as Outflow of Fund.
 For example, if the fund raised by way of issue of shares will be taken as a source of
fund or inflow of fund.
 This transaction results in increase of the financial position. Like this, the fund used
for the purchase of machinery will be taken as application or use of fund or outflow
of fund. Because it stands to reduce the fund position.
 OBJECTIVES OF FFS
 To find out the position of working capital on two dates of balance sheet
 To know that changes in working capital during this period
 To know the causes of changes in working capital
 To know the inflow of funds according to their sources
 To know the item wise outflow of funds during this period.
 IMPORTANCE OR USES OF FUND FLOW STATEMENT

 Fund Flow Statements are prepared for financial analysis in order to

meet the needs of people serving the following purposes:
It highlights the different sources and applications or uses of funds
between the two accounting period.
It brings into light about financial strength and weakness of a concern.
It acts as a effective tool to measure the causes of changes in working
capital.
It helps the management to take corrective actions while deviations
between two balance sheet figure.
 CONTINUE…..
It is an instrument used by the investors for effective decisions at the time of their
investment proposals.
It also presents detailed information about profitability, operational efficiency and
financial affairs of a concern.
It serves as a guide to the management to formulate its dividend policy, retention
policy and investment policy etc.
It helps to evaluate the financial consequences of business transactions involved in
operational finance and investment.
It gives the detailed explanation about movement of funds from different sources or
uses of funds during a particular accounting period.
NO FLOW OF FUNDS
SOME TRANSACTIONS MAY NOT MAKE ANY MOVEMENT OR CHANGES IN THE FUND POSITION.
SUCH TRANSACTIONS ARE INVOLVED WITHIN THE BUSINESS CONCERN.
LIKE THE TRANSACTION WHICH INVOLVES BOTH BETWEEN CURRENT ASSETS
AND CURRENT LIABILITIES OR BETWEEN NON-CURRENT ASSETS AND NON-CURRENT
LIABILITIES AND HENCE DO NOT RESULT IN THE FLOW OF FUNDS.
FOR EXAMPLE, CONVERSION OF SHARES IN TO DEBENTURE.
SUCH TRANSACTION INVOLVES BETWEEN NON-CURRENT ACCOUNT ONLY AND THIS ACTIVITY
DOES NOT EFFECT IN INCREASE OR DECREASE OF THE WORKING CAPITAL POSITION.
USES, ADVANTAGES
 Important for management
 Helpful in financial analysis
 Analysis of many perplexing question
 Formation of dividend policy
 Proper allocation of resources
 Use of working capital
 Helpful in comparative study
 Helpful in getting loans