FUND FLOW & CASH By: Aakash Sharma

FLOW ANALYSIS
FUND FLOW STATEMENT
Funds flow statement: is a statement that explains the working capital change in a
company. It is an analytical statement of the changes presenting its financial position
between two balance sheet statements. It depicts the monetary outflow and inflow of
the sources and the applications of funds during a particular period.
Fund Sources or where the funds came in from with their sources.
Fund application or where the long or short-term funds have been used.
Companies have long-term funds in non-current assets like patents, other investments in
various companies, plant and machinery, intellectual property rights, equipment,
buildings etc.
Thus, non-current assets are created in a financial year whose monetary value is not
fully realised in that accounting and financial year.
FUND FLOW STATEMENT
BENEFITS
An aid to fund managers in explaining the strain on working capital and liquidity of
a company, though the P&L Statement may declare it to be profitable.
It helps the fund managers explain the financial strengths of a company despite its
operational losses.
It helps the fund managers analyse the fund flow and risk level when misusing short-
term funds to finance long-term assets. Usually, this is a grey area that is not
reflected in either the company's balance sheet or P&L statement.
FUND FLOW STATEMENT
PROFORMA
ADVANTAGES OF FUND FLOW
STATEMENT
Shows Changes in The Financial Position of the Company: the movement of the
funds and changes in the financial position of the company between two accounting
periods, which the balance sheet or the profit and loss statement fail to provide.
Level of Working Capital Adequacy: it helps to test if working capital has been
effectively used or not. It helps to understand if short-term sources of funds are used
to build long term assets and vice versa. Overall it aids better working capital
management for the firm.
Future Business and Budget Projections: can be used for putting up necessary
controls and budgetary allocations. Projected statements aid in deciding future
financial policies like credit period, inventory requirement, etc. for the company.
DISADVANTAGES OF FUND
FLOW STATEMENT
Lacks Originality: said to lack originality because this statement is merely a
systematic rearrangement of items in financial statements over two accounting
periods. It is because of this reason that many companies avoid the preparation of
fund flow statement.
Based on Historical Data: the company has performed in the previous year and does
not give much clarity of the current and future costs of the company. Hence, it does
not reveal the realistic comparison of the profit position of the company. Also, the
projected fund flow statement is also not very accurate.
Cannot be Used on Standalone Basis: gives an idea of changes in working capital of
the company, it cannot be used standalone, without a balance sheet and profit and loss
statement. Hence, a fund flow statement can, in no way, substitute financial
statements.
CASH FLOW STATEMENT
It describes the cash flows into and out of the organization. Its particular focus is on
the types of activities that create and use cash, which are operations, investments,
and financing.
A smaller organization may not release a statement of cash flows for internal use,
preferring to only issue an income statement and balance sheet. However, it is a
required part of the audited financial statements that are released to lenders,
creditors, regulators, and investors.
COMPONENTS OF CASH FLOW
STATEMENT
Operating activities: These constitute the revenue-generating activities of a
business. Examples of operating activities are cash received and disbursed for
product sales, royalties, commissions, fines, lawsuits, supplier and lender invoices,
and payroll.
Investing activities: These constitute payments made to acquire long-term assets, as
well as cash received from their sale. Examples of investing activities are the
purchase of fixed assets and the purchase or sale of securities issued by other
entities.
Financing activities: These constitute activities that will alter the equity or
borrowings of a business. Examples are the sale of company shares, the repurchase
of shares, and dividend payments.
DIRECT METHOD & INDIRECT
METHOD
There are two ways in which to present the statement of cash flows, which are the
direct method and the indirect method.
Direct method: requires an organization to present cash flow information that is
directly associated with the items triggering cash flows, such as:
Cash collected from customers
Interest and dividends received
Cash paid to employees & suppliers
Interest paid
Income taxes paid
DIRECT METHOD & INDIRECT
METHOD
Indirect method: approach, the statement begins with the net income or loss reported
on the company's income statement, and then makes a series of adjustments to this
figure to arrive at the amount of net cash provided by operating activities. These
adjustments typically include the following:
Depreciation and amortization
Provision for losses on accounts receivable
Gain or loss on sale of assets
Change in receivables
Change in inventory
Change in payables
ADVANTAGES OF CASH FLOW
STATEMENT
Ascertaining Liquidity and Profitability Positions: cash position of a firm at the time
of making payment it directly helps to ascertain the liquidity position, the same is also
applicable in case of profitability.
Ascertaining Optimum Cash Balance: optimum cash balance can be determined, it is
possible for a firm to ascertain the idle and/or excess and/or shortage of cash position.
Cash Management: Proper management of cash is possible if cash flow statement is
properly prepared. The management can prepare an estimate about the various inflows
of cash and outflows of cash so that it becomes very helpful for them to make plans for
the future.
Capital Budgeting Decisions: relates to the decision of capital expenditure in various
forms on a long-term basis cash flow timing is very important for this purpose.
DISADVANTAGES OF CASH
FLOW STATEMENT
Fails to present Net Income: fails to present the net income of a firm for a period
since it does not consider non-cash items which can easily be ascertained by an
Income Statement. It can be used as a supplement to Income Statement.
Fails to Assess the Liquidity and Solvency Position: Proper liquidity position
cannot be assessed from the cash flow statement which presents only the cash
position at the end of the period.
Not to Assess Profitability: Practically, cash flows from operation does not help to
assess profitability of a firm since it neither considers the costs nor revenues.
Does not Assess Future Cash Flows: Since cash flow statement is prepared on the
basis of historical cost and, as such, it does not help to know the future/projected
cash flows.
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