Know The Difference Between A Cash Flow Statement And A Fund Flow Statement

A company has 4 financial statements that divulge a look at its financial position and business operations. These are:

• The balance sheet
• The income statement
• The cash flow statement
• The fund flow statement

Of the above-mentioned financial statements, cash flow, and fund flow statements are documents of disclosure that describe a company’s liquidity position. Though they are closely related, they have entirely different purposes. Cash flow and fund flow are critical indicators of a company’s financial health. Both expressions are used to evaluate a company’s success – but for different reasons.

For example, the financial health can be evaluated by looking at the cash flow statement, which will provide insight into the cash position and how the company generates cash and spends it. Keep in mind cash flow statements do not consider the amount that will be received in the future and an increase in inventory value. These factors need to be considered to depict long-term financial health, which is reflected through fund flow statements.

What are Cash Flow Statements?

The cash flow statement depicts changes in a company’s cash and cash equivalents (cash inflows and outflows). The phrase ‘cash flow’ is made up of the terms’ cash’ and ‘flow,’ where cash corresponds to the cash and cash equivalents which has marketable security, t-bills, bank drafts, etc. and flow pertains to the transfer of money in and out of the organization, which may be increased or decreased.

It’s an analytical accounting statement that shows the flow and direction of cash and cash equivalents within a given accounting period. The cash flow statement is concerned with items involving currency transactions.

Example of Cash Flow Statement-

The Rs. 30,000 next to increase in inventory means that Rs. 30,000 worth of inventory was bought during the given accounting period, so the net income is decreased by this amount.

The amount of Rs. 20,000 next to the depreciation is a non-cash expense on the income statement and since depreciation doesn’t signify a decrease in cash, it is added back to the net income.

Cash flow statements can be broken down into three sections.

• Cash Flow from Operating Activities – It accounts for cash generated by a company’s core or general operations.

Here is the formula for calculating the operating activities cash flow – 

Operating Cash Flow = Operating Income + Non-Cash & Non-operating Expenses – Taxes + Changes in Working Capital.

• Cash Flow from Investing Activities – This component will include all of the company’s inflows and outflows arising from its investments (such as new equipment purchases, sale of existing machinery).
• Cash Flow from Financing Activities- This subcategory keeps track of all transactions that finance a company’s operating and investment activities, such as proceeds from new loans, dividends given to investors, and so on.

What are Fund Flow Statements?

The term “fund” refers to an amount of money used to finance a company’s operations and acquire assets. During 1971 and 1987, GAAP mandated the money flow statement on the bookkeeping department.

A Fund Flow Statement is a financial statement that displays the source of all funds and their application. It shows the changes in working capital, which is a difference in the current assets and liabilities. Since current assets include cash, cash equivalents, account payables, short-term loans, advances, etc. so, the fund statement shows the impact of changes in these and not just the change in cash. The fund flow statement recognizes two primary sources of funding:

• Money flowing in and out of a firm during business operations.
• Long-term funds obtained by issue of shares, or raising new loans.

Earlier, accountants utilized the statement of money flow to record any variation in a business’s net working capital, or the disparity among assets and liabilities, over a specified period when necessary. The cash flow statement generally contains a lot of this information. The fund flow statement can be used to uncover any unusual financial activity or cost.

Today, the fund flow statement is more significant for investing. Investor sentiment may be measured in terms of many asset types. For example, businesses have non-current assets like patents, buildings, machinery, intellectual property rights, investment in other companies, etc., as long-term funds. So the monetary value of non-current assets is not fully realized in the accounting and financial year when they are created. This leads to two outcomes-

• Financing of non-current assets through long-term funds – These assets are reflected as utilized from long-term funds in the fund flow statement. These variations are understood if the business is using only the long-term funds for financing of current assets. It reflects healthy company behavior that is using proper funds for positive growth.
• Financing of non-current assets through short-term funds – This reflects a dangerous use of short-term funds on long-term investment, which is not appreciated. This is critical if the company is cash bound for its short-term funds because investments are long-term, and liquidation is not easily executed.

This is where fund flow analysis comes into the picture. It helps in finding the application and change in working capital, whether it is a short-term or a long-term fund. Through the utilization of fund flow statements, you can interpret the impact of changes in the funds’ use and position in the time interval between two balance sheets.

The Prime Difference Between Cash Flow Statement and Fund Flow Statement

The value of financial security in operating a business cannot be overstated. The disclosures play an important part in the company’s balance sheet by stating future plans and operations and recognizing any problems. However, there are many differences between cash flow statements and fund flow statements, which are explained below in detail:

The Bottom Line

In today’s competitive marketing world, financial soundness is one of the most important themes to consider. It is necessary to comprehend the ideas to know more about financial health. The major differences between cash flow statements and fund flow statements are mentioned above, which are similar but not identical. Working capital includes cash as one of its components. 

So, if the cash position improves, the funds’ situation improves as well, but conversely is not necessarily true. That is to say, when cash influx occurs, it results in fund inflow, but it does not cause cash inflow.