Funds Flow Statement

One of the most crucial aspects of running a business is managing the working capital and adequately utilizing funds. It is vital to keep a tab on the inflow and outflow of funds in the business. The funds flow statement is a document that helps in assessing the sources of funds that come into the company and the utilization of the funds. Let us understand what is funds flow statement and its importance.

What is a Funds Flow Statement?

A funds flow statement is a financial document used to analyse the flow of funds, that is the sources and applications of funds in an organization, during a particular period of time. This statement analyses the balance sheets for two years and checks the movement of funds from the last fiscal year to the current one.

Basically, it is used to compare the inflow and outflow of funds during a specific accounting period. It is also instrumental in analyzing how the inflow and outflow of funds affect the working capital held by any company.

The funds flow statement is also known as the ‘application of the funds’ and ‘statement of sources’ because it provides a clear picture of the various sources of funds inflow and the different points of application.

Normally, once a funds flow statement is prepared, it is followed by a funds flow analysis. This serves as a financial parameter that provides a company with the guidance needed to manage its finances and come up with better strategies to use funds.

What is Funds Flow Statement Analysis?

Funds flow statement analysis draws a comparison between changes in different aspects of a balance sheet. While you evaluate this statement, it is important to understand the different aspects as given below:

Assets:

If there is an increment in the asset section of a balance sheet, it indicates that the organisation has purchased assets by using funds. These assets could result in the outflow of funds. However, if the assets decrease during a period, it means that the company has sold some of its assets and there would be an inflow of funds.

Liabilities:

If there are any increases in liabilities, it means that the organisation has a funds inflow which requires to be paid off in the future. Similarly, a decline in liabilities indicates that any existing obligations have been handled and there would be an outflow of funds from the business.

Uses of a Funds Flow Statement

While primarily a funds flow statement is used by companies and businesses to monitor the flow of money in and out of the organisation, it also has other uses.

Often an organisation has enough substantial profit that can be distributed as dividends but finds it challenging to do so because of a shortage of liquid funds. With a funds flow statement, such an organisation can identify where the liquidity blockage is occurring and plan out a dividends distribution policy that will help get the job done.

A funds flow statement also provides an analytical view of the differences between current assets and liabilities. It shows how these changes are taking place regarding funds. Often, even a profitable company might face cash crunch issues. In such events, a funds flow statement will show a clear picture of the profit that the organisation has earned.

This statement brings the underlying financial issues of a company to the surface and also highlights problems a company could face in the future. Thus, it enables management to come up with strategies and solutions to protect the company from financial losses.

Although it is highly useful, a funds flow statement cannot highlight other financial parameters in a balance sheet. It can also provide a slightly inaccurate picture of the financial position of a company. Thus, a funds flow statement is not without its own set of limitations.

However, it has many advantages and if used correctly can be a useful tool in managing a business’ working capital. The funds flow statement can be used by investors before investing to know how efficiently the company raises and uses its funds.