Fund Flow Statement: Explanation, Importance, and Structure

What does the Fund Flow Statement mean? Funds flow statement is the statement of sources and uses of the fund. Fund Flow Statement: Explanation, Importance, and Structure. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied. Also learned, Venture Capital: Introduction, Definition, Characteristics, Advantages, and Disadvantages.

The Concept of Fund Flow Statement.

The topic is studying; Explanation of Fund Flow Statement, Meaning of Fund Flow Statement, Definition of Fund Flow Statement, Importance of Fund Flow Statement, and Structure of Fund Flow Statement. Funds flow statement comprises three words- fund, flow, and statement. “Fund” means the financial resources used by a concern. In the sense of working capital. The excess current asset over the current liabilities is called net working capital.

Similarly. The term “Flow” means the movement of funds and includes both inflows (receipt) and outflows (payments) of found. Funds from the operation, issue of share and debentures, additional long term debt, non-operating revenues etc. are considered as the major sources of fund. Increase in working capital, the redemption of the debenture, repayment of the long term loan, payment for non-operating expenses etc. are the amine areas of uses of the fund.

The term “Statement” represents the format or account under which the flows of fund i.e. cash inflows and outflows are recorded. Funds flow statement is known by various names such as statements of sources and uses of funds, the summary of financial operations, which got and where go statement, movement of the working capital statement, funds received and disbursement statement etc.

#Explanation of Fund Flow Statement:

The balance sheet and income statement are the traditional basis financial statements of concern. They furnish useful financial information regarding the operation of the concern; however, a serious limitation of these statements is that they fail to provide of time regarding changes in the financial position of a concern during a particular period of time. Funds flow statement, which is known as the statement of changes in financial position, overcomes these limitations of traditional financial statements.

Funds flow statement is the statement of sources and uses of the fund. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied.

Meaning of Fund Flow Statement:

A fund flow statement is a statement in summary form that indicates changes in terms of financial position between two different balance sheet dates showing clearly the different sources from which funds are obtained and uses to which funds are put. The profit and loss account and balance sheet statements are the common important accounting statements of a business organization.

The profit and loss account provides financial information relating to only a limited range of financial transactions entered into during an accounting period and its impact on the profits to be reported. The balance sheet contains information relating to capital or debt raised or assets purchased. But both the above two statements do not contain a sufficiently wide range of information to make an assessment of the organization by the end user of the information.

In view of the recognized importance of capital inflows and outflows, which often involve large amounts of money should be reported to the stakeholders, the funds flow statement is devised. In funds flow analysis, the details of financial resources availed and the ways in which such resources are used during a particular accounting period, are given in a statement form called “Funds flow statement”.

The sources of funds also include the funds generated from operations internally. The funds flow statement can explain the reasons for the liquidity problems of the firm even though it is earning profits. It helps the efficient working capital management and indicates the ability of the firm in servicing its long-term debt obligations. The changes in working capital position can also be tracked by observing the surplus/deficit of funds during a particular accounting period.

Definition of Fund Flow Statement:

Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between the beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.

Some definitions of financial experts are given for the clear conception of fund flow statement:

Foulke defines these statements as:

“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

According to R. N. Anthony:

“The fund’s flow statement describes the sources from which additional funds were derived and the use to which these sources were put.”

I.C.W.A. in Glossary of Management Accounting terms defines Funds Flow Statement as,

“A Statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”

Roy A. Fouke defines a fund flow statement as,

“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of funds taking place within a business during a particular period of time and its effect on the net working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet, but it is a useful supplement to them. It describes the sources from which funds are obtained and the uses of these funds, in a condensed form.

#Importance of Fund Flow Statement:

A funds flow statement is an essential tool for financial analysis and is of primary importance to financial management. Nowadays, it is being widely used by the financial analysts, credit granting institutions and financial managers.

The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied.

The importance of fund flow statement may be summarised:

Analyses Financial Statements:

Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an enterprise. Fund flow analysis shows the changes in the financial position between two balance sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds during a particular period.

Hence it is a significant tool in the hands of the management for analyzing the past, and for planning the future. They can infer the reasons for imbalances in the uses of funds in the past and take corrective measures for the future.

Answers Various Financial Questions:

Fund flow statement helps us to answers various financial questions such as:

• How many funds flowed into the business?
• How much of these funds were provided by the operations?
• What are the other sources of funds?
• How were these funds used?
• Why was there less/more amount of net working capital at the end of the period than at the beginning?
• Why were the dividends not larger?
• How was the purchase of fixed assets financed?
• Where has the net profit is gone?
• How were the loans repaid?

Rational Dividend Policy:

Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to inadequate working capital. In such circumstances, fund flow statement shows the working capital position of a firm and helps the management to take policy decisions on dividend etc.

Proper Allocation of Resources:

Financial resources are always limited. So it is the duty of the management to make its proper use. A projected fund flow statement enables the management to take the proper decision regarding allocation of limited financial resources among different projects on a priority basis.

Guide to Future Course of Action:

The future needs of the fund for various purposes can be known well in advance from the projected fund flow statement. Accordingly, timely action may be taken to explore various avenues of the fund. A projected funds flow statement also acts as a guide for the future to the management.

The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.

Proper Managing of Working Capital:

It helps the management to know whether working capital has been effectively used to the maximum extent in business operations or not. It depicts the surplus or deficit in working capital than required. This helps the management to use the surplus working capital profitably or to locate the resources of additional working capital in case of scarcity. A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve the working capital position of the firm.

Guide to Investors:

It helps the investors to know whether the funds have been used properly by the company. The lenders can make an idea regarding the creditworthiness of the company and decide whether to lend money to the company or not.

Evaluation of Performance:

Fund flow statement helps the management in judging the financial and operating performance of the company.

#Structure of Fund Flow Statement:

The structure of fund flow statement like other accounting statements is based on the equality of financial assets and liabilities.

To bring the form of fund flow statement on a scientific line, the fund flow statement is divided into two parts:

• Schedule of working capital changes, and.
• Statement of sources and uses of the fund.

Now explain;

Schedule of Working Capital Changes:

This schedule is also called “Comparative Change in Working Capital Statement” of “Statement of Working Capital Changes” or “Working Capital Variation Statement” or “Net Current Assets Account” or “Working Capital Account”. The increase in working capital is treated as use of fund and decrease in working capital is termed as sources of fund.

This statement or schedule is prepared in such a way or form as to indicate the amount of working capital at the end of two years as well as increase or decrease in the individual items of current assets and current liabilities.

The following rules should be taken into account while ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital:

• Increase in the items of Current Assets will increase the Working Capital.
• The decrease in the items of Current Assets will decrease the Working Capital.
• Increase in the items of Current Liabilities will decrease the Working Capital.
• The decrease in the items of Current Liabilities will increase the Working Capital.

Statement of Sources and Uses of Fund:

This is the second but most important part of Fund Flow Statement. It is prepared on the basis of the changes in Fixed Assets. The preparation of Statement of Sources and Uses of Fund involves the ascertainment of increase/decrease in the various items of fixed assets, long term liabilities and share capital in the light of additional information given below.

To give an idea of the different items of sources and uses, the probable items of sources and uses of the fund are tabulated below.

Sources of Fund:

The following sources below are;

• An issue of fresh shares (derived from an increase in share capital).
• The Issue of Debentures (derived from the increase in debentures).
• Raising of new loans (derived from the increase in long term loans).
• Sale of fixed assets for cash or for other current assets (derived from the decrease in fixed assets and additional information).
• Non-trading income.
• Profit from operations (before deducting non-cash items of expenses and losses and before adding non-cash, non-trading income), and.
• The decrease in working capital (derived from the schedule of working capital changes).

Uses of Fund:

The following uses below are;

• Redemption of Preference Shares in cash (derived from the decrease in share capital).
• Redemption of debentures in cash (derived from the decrease in debentures).
• Repayment of loans (derived from the decrease in long-term loans).
• Purchase of fixed assets for consideration other than shares, debentures or long term debt (derived from the increase in fixed assets and additional information).
• Loss from operations.
• Payment of dividend in cash, and.
• Increase in working capital (derived from the schedule of working capital changes).