A fund flow statement is a financial document that reflects the movement of funds within a business in a particular period. It provides information about the source from where funds were derived and how the funds were utilized. It helps stakeholders to understand the changes in a company’s financial structure.

Elements such as bills payable, equity issuance and sale of assets, are tracked to understand the fluctuations in working capital. This statement is helpful for drafting the financial plans of an organization, identifying any problems in cash flow, and analysing its use of funds. With fund flow analysis, businesses can make informed decisions and maintain financial security.

What is a Fund Flow Statement?

The fund flow statement meaning is that it is a financial report which is used to show how money is moved around a company during a specific accounting period. Its purpose is to analyze the inflow and outflow of funds to show the changes in the financial standing of the company. The fund flow statement focuses on cash, as well as transactions that aren’t included in the cash flow statement, such as credit sales and accrual-based transactions.

Fund flow statements are valued for their ability to track the generation of funds (sources) and usage of funds (applications) in an in-depth manner that is specifically relevant to a company’s working capital management. This is particularly useful for decisions in the short term as well as long-term financial planning.

Issuing shares, borrowing long-term, or selling fixed assets would be typical fund sources. Purchasing assets, and paying back loans or dividends to shareholders are typically applications of funds. Tracking these activities can help companies assess whether they are translating the received funds into useful growth and operational efficiency.

Importance of Fund Flow Statements

A fund flow statement provides valuable information on whether a company is correctly managing its working capital and if its cash generation mechanisms are in good working order. Stakeholders can use the financial statement for the below purposes.

Evaluating Financial Health

The statement allows a company’s management to examine its financial health by presenting the sources of funds and their uses over a given period of time. It is an indicator of whether the company generates sufficient internal funds or it relies on external fund sources to meet its financial obligations.

Planning and Decision-Making

The fund flow statement helps analyze the inflow and outflow of funds through the company. The management can leverage this financial accounting data when deciding on future investments, purchase of assets or liability management. It can help managers draft long-term financial plans.

Detecting Financial Imbalances

The statement can help identify financial imbalances by calling attention to areas where funds are overutilized or underutilized. It assists management in gauging the efficiency of working capital or if there are cash flow problems that might impact business operations.

Transparency for Stakeholders

The fund flow statement promotes transparency as it allows stakeholders and investors to see how the company raises money and then uses it. If the company is using its resources in a way that could be sustained long-term, then they are more likely to invest.

Key Components of a Fund Flow Statement

A fund flow statement includes several components which together give a complete picture of the financial activities of a company. Let’s look at the core components below.

Sources of Funds

• • Long-Term Borrowings: These consist of loans borrowed from a bank or financial institution, debentures issued, or any other means of financing of a long-term nature. Such funds can be used for expansion, purchase of assets, or other long-term investments.
  • Issuance of Shares: Another source of raising finance is by issuing new shares.  It strengthens the financial state of the company and increases funds for growth opportunities. 
  • Sales of Fixed Assets: Selling a company’s land, machinery, or buildings generates cash. This strategy works best when the assets are being replaced or no longer in use.
  • Non-Operating Income: Earnings from non-core business activities like dividends received, interest income, or the sale of an investment fall under this.

Also Read: What are Non-Operating Expenses 

Uses of Funds

• • Purchase of Fixed Assets: Investments in long-term assets, including machinery, equipment or real estate will require good amounts of capital. It could indicate a company’s intention to expand and grow.
  • Repayment of Long-Term Debt: Repaying a loan, redeeming debentures or settling long-term liabilities signifies the use of funds to maintain the company’s financial well-being. 
  • Dividend Payments: Dividend payments to shareholders are a major use of funds and are a sign of the company’s profitability, as well as its willingness to reward its investors.
  • Increase in Working Capital: An increase in current assets (inventory, receivables) or a decrease in current liabilities (account payable) requires additional cash flow.

Net Changes in Working Capital

This compares the changes in current assets and current liabilities. Increases in working capital are seen as desirable, while decreases may indicate that a company is managing cash poorly, using up working capital to continue day-to-day operations.

How to Prepare a Fund Flow Statement?

Preparation of a fund flow statement for a business is a multistep process that tracks how funds flowed in and out of a company over a given period of time. 

Here’s a step-by-step approach to Preparation of a fund flow statement.

Step 1: Analyze Changes in the Balance Sheet

Preparation of a fund flow statement starts by looking at what has changed in the balance sheet, specifically accounting for the two areas below:

• Fixed Assets and Liabilities: Here, look at non-current assets (property, plant, and machinery) and long-term liabilities (loans, debentures). Increases in liabilities represent a source of funds; increases in assets represent a use of funds.
• Working Capital: Measures change in current assets (inventory, receivables) and current liabilities (bills payment). An increase in working capital means more funds have been tied up in operations.

Step 2: Determine the Changes in Working Capital

Working capital highlights the difference between current assets and current liabilities. The statement first calculates the net change in working capital, increased or decreased in the period. It shows the amount of cash required or released from everyday business operations.

Step 3: Identify the Sources of Funds

Next, identify and list the sources of funds. These are:

• Issuance of shares or debentures
• Long-term borrowings
• Sale of fixed assets
• Non-operating incomes, such as interest or dividend income

These are inflows of cash for the company to use in its operation or investment activities.

Step 4: Identify the Uses of Funds

After listing the sources, understand where the money has been spent. Possible uses are as follows:

• Purchase of fixed assets
• Repayment of long-term debt
• Dividend payments
• Investment in other companies

These uses demonstrate how the enterprise uses its resources to facilitate growth, repay liabilities or reward its shareholders.

Step 5: Prepare the Fund Flow Statement

Finally, prepare the fund flow statement by summarizing the sources and uses of funds and draw a conclusion of how the business has successfully handled its funds during the accounting period. It shows if a business has generated sufficient internal cash to meet its operating requirements or it relied on external sources.

One can apply the above steps to the preparation of a fund flow statement which can be useful in understanding the current financial state of a business and accordingly plan for future investments.

Fund Flow Statement – Analysis and Interpretation

Following the fund flow statement preparation, businesses must interpret the data and use it for making a decision.

Here are some insights offered by fund flow statements.

Assess Changes in Working Capital

One of the key purposes of the fund flow statement is to analyze working capital. This is done by comparing the working capital value at the beginning and at the end of the financial period in order to determine whether the business has efficiently used their current assets and liabilities.

Increase in Working Capital

An increase means that more funds are tied in current assets – indicative of growth but could also mean facing liquidity issues if not balanced with liabilities. 

Decline in Working Capital

It could be a sign of improved liquidity. But it can also indicate that the company has been unable to maintain sufficient resources to keep the business running.

Identify Major Sources of Funds

Knowing the sources of funds provides insight into how the company raises funds, for example:

Equity Issuance

When a company raises money by issuing equity that means it is expanding or raising money without taking on debt but it also means dilution of ownership. 

Long-Term Liabilities

Multiple loans may be reflective of high-risk behavior, and the company’s reliance on debt.

Selling Assets

Selling fixed assets is one way to generate cash but might also be a sign of financial problems if it is a frequent occurrence.

Know Uses of Funds

The fund flow statement can show how the company assigns and manages resources.

• Purchasing Fixed Assets: Investments in long-term assets like property or machinery signify expansion and growth but, if investments are made with limited financial resources, the business might experience cash-flow problems.

• Paying Down Loans: Loan repayments might be viewed positively, as the company is reducing its level of debt. However, it also means it must generate sufficient cash flows to meet these obligations.  
• Dividends Payments: Paid dividends means the company is doing well and distributing profits among shareholders. But, a high payout can result in a reduced amount of capital for reinvestment.

Learn the State of Cash Flow

The fund flow statement is intended to be used along with the cash flow statement. Even if a company has a positive net fund flow from operations, it could still be running into cash-flow problems from its investments or financing activities.

Identify Financial Issues

The statement could highlight financial imbalances such as:

• Overuse of Credit: An excessive use of loans or credit lines by a company could put the business in a precarious spot with rising interest rates and repayment terms. 
• Asset Mismanagement: Too much investment in fixed assets (property or equipment) or a stagnant portfolio of current assets (stock or inventory) might mean the company is not using its assets efficiently enough.

Identify Growth or Decline Trends

One can discover trends by comparing this information with previous similar statements. Constant growth in working capital might reflect a business that is expanding steadily, while a declining asset account or working capital could indicate the poor financial health of a business.

Efficient Fund Utilization

A comprehensive analysis would help businesses understand how their finances are being managed. Efficient utilization can lead to investment in growth opportunities without financial strains. Poor management indicates a need for reviewing and implementing new financial strategies.

These insights can help discover trends of growth and decline. They can help companies take proactive measures to maintain a healthy financial position.

Bills Payable in Fund Flow Statements

When the company buys supplies from a vendor on credit, it has the obligation to pay the vendor for those supplies, the obligation is referred to as bills payable. Bills payable are a category of short-term liabilities in the accounting books of a business. They are promissory notes or agreements made by the company to pay a certain amount to the creditor on a specific date. Bills payable are generally reported under current liabilities on a company’s balance sheet.

Bills payable play a vital role in fund flow statements as they can impact a company’s working capital. If there is an increase in bills payable, it means the business is not paying promptly, which is equivalent to having more working capital, which can be used for other necessary short-term purposes. On the other hand, if there is a decrease in bills payable, it means the business has settled its outstanding liabilities, thus reducing the amount of capital available for short-term needs.

Example of Bills Payable in Fund Flow Statements

Let’s look at a bills payable example below, to understand its role in fund flow statements.

• In the balance sheet as of December 2023, the bills payable stood at ₹150,000.
• In the following balance sheet as of March 2024, the bills payable decreased to ₹100,000.

In fund flow, this reduction of ₹50,000 in bills payable is expressed as use of funds, as the company used its cash to reduce its liabilities. An increase in bills payable will appear as a source of funds, as it would have meant that the company generated working capital by putting off payments.

Here’s how it looks in the fund flow statement:

Changes in bills payable can help businesses gain insights into their short-term liquidity and working capital management.

Fund Flow Statement Example: The Preparation

Let’s understand the fund flow preparation steps with an example. The two main sections to be focused on are – sources of funds and uses of funds, the details for which can be found in the balance sheet and income statement.

Scenario:

Consider ABC Ltd. for the financial year ending March 2024. Below are the relevant extracts from the financial records:

• Opening balance of working capital: ₹500,000
• Closing balance of working capital: ₹650,000
• Additional equity raised: ₹200,000
• Long-term loan repaid: ₹100,000
• Purchase of machinery: ₹250,000
• Sale of an old asset: ₹50,000
• Increase in stock: ₹150,000
• Decrease in bills payable: ₹50,000

Step 1: Determine Changes in Working Capital

Get the difference between the opening and closing balances of working capital.

• Closing working capital: ₹650,000
• Opening working capital: ₹500,000
• Increase in working capital: ₹150,000

Step 2: List Sources of Funds

These are any inflows that increase the company’s working capital, for example, equity raising or assets sale.

Step 3: List Uses of Funds

These are outflows that decrease the company’s working capital, for example,  loan repayment, buying of assets, or reduction in bills payable.

Step 4: Balance the Fund Flow Statement

Finally, calculate the total on both sides to ensure everything balances.

• Total Sources of Funds: ₹250,000
• Total Uses of Funds: ₹550,000

The net change in working capital (₹150,000) is the difference between sources and uses.

Conclusion

The fund flow statement meaning is that it helps businesses analyze their financial activities over a specific period. By focusing on the sources and uses of funds, businesses can understand the state of their working capital. For example, they can get insights into how their resources and finances are being allocated and managed.

At the same time, it also helps to understand if the company has built up financial strength through its long-term investment strategies, and its impact on the balance sheet.

However, it must be stressed that while the fund flow statement displays the financial structure of a company, it is unable to shed light on short-term liquidity, a key factor for day-to-day operations. Therefore, it should be used in conjunction with other financial statements, such as cash flow statements, to obtain a broader understanding of the company’s financial position.

To conclude, a periodic analysis of the fund flow statement will aid in decision-making and help with financial management.

FAQs

What is the difference between a fund flow statement and a profit and loss statement? 

A fund flow statement tracks the flow of funds within a company, i.e. where the money came from and where it went to, whereas a profit and loss statement shows the revenue and expenses of the company over a certain period in order to determine the company’s profit.

How does a fund flow statement help in financial forecasting? 

A fund flow statement helps management to detect patterns in how the company acquires and spends its funds. The data can be used for forecasting and assessing, for example, if the company needs funds for its operations or it can focus on scaling.

Can a fund flow statement indicate financial distress? 

Yes, a fund flow statement that highlights a pattern of frequent or large sources of debt, or the dwindling of working capital, could be indicative of a company being in financial distress.

How often should a company prepare a fund flow statement? 

Though companies usually involve in the preparation of a fund flow statement once a year, a business might choose to prepare it on a quarterly or semi-annual basis, especially in the case of major financial structuring like expansion.

Does a fund flow statement provide information on operational efficiency?

Indirectly, yes, because any change in working capital or investments in assets can be seen through the movement of funds, thus providing an idea of operational efficiency and how resources are being allocated.

How can fund flow analysis help in debt management? 

Fund flow analysis highlights if a company is paying off its debt and whether it has enough funds to manage its liabilities. The data can be used to draft and implement strategies to ensure the company is not over-burdened with debts.

What role do non-cash transactions play in a fund flow statement? 

Depreciation or asset revaluation are non-cash transactions that affect a company’s financial health without directly impacting cash balance. Thus, they cannot be found in the cash flow statement but are mentioned in fund flow.

How does a fund flow statement affect decision-making for investors? 

The statement shows how a company generates, spends, and invests its funds. It can help investors understand a company’s financial viability over the long-term.

Can a fund flow statement be used to evaluate mergers or acquisitions? 

Yes, the fund flow statement shows how the money is sourced for a takeover or for a merger. It also highlights if the company is able to fund its takeovers without over-taxing its resources.

What is the significance of analyzing working capital in a fund flow statement?

Calculating changes in working capital is fundamental for assessing a company’s liquidity and its operational health. It informs about how well current assets and liabilities are managed to cope with short-term requirements.