A fund flow statement is a financial report describing the difference in the balance sheet items over a specific term. A fund flow statement analyzes the sources and uses of a company’s funds between two points of time. However, many people and financial experts describe the word ‘Fund’ in many ways.
Many interpret funds as mere cash, and a fund flow statement formulated out of this aspect is known as a cash flow statement, where only the outflow and inflow of cash flow get recorded.
The cash flow statement omits numerous accounting items which do not directly impact cash or working capital. This is the reason companies prepare fund flow statements as it helps them identify the change in working capital. The sources and the arrangement of working capital at the end of the term are crucial elements in assessing expansion activities and evaluating a business’s ability to thrive in the future.
Understanding the Fund Flow Statement
A fund flow statement can be defined as a statement outlining the changes in the financial standing of a company, including the sources from which the companies obtained funds and the specific use of these funds. In addition, a fund flow statement reveals the outcome of the procedures followed by the financial control in a way that makes it more understandable than the other financial statement.
An example of a fund flow statement is when a company invests funds in long-term assets like patents, intellectual property rights, plant and machinery, equipment, buildings, and more. These are usually the non-current assets that remain in the financial statements for more than a year. Due to this, there arise two situations:
- When long-term accounts fund non-current assets: The fund flow statement will show these assets were acquired using long-term funds.
- When short-term accounts fund non-current assets: The changes in the fund flow statement disclose the use of short-term funds.
So we can say that the fund flow estimation can specify the change and use of working capital, be it short-term or long-term funds, to help companies understand their financial health.
What is the Fund Flow Statement Format?
Mentioned hereunder is the fund flow statement format.
| Sources of Funds | Amount | Application of Funds | Amount |
| Capital Funds | XXX | Funds used in fixed assets. | XXX |
| Loans and Debts | XXX | Funds used in other Non- current assets. | XXX |
| Operations generated Funds | XXX | Funds used for repaying loans existing. | XXX |
| Sale of company assets (if any) *(Balance figure) Excess of sources minus funds utilized. [Working capital decrease] | XXX | Funds used for paying dividends, taxes, etc. *(Balance figure) Funds minus the application of funds shortage. [Working capital increase] | XXX |
| Total | XXX | Total | XXX |
Features of Fund Flow Statements
A fund flow statement is a financial report that records the outflow, inflow, and movement of business funds. Below are some salient features of a fund statement.
- The primary feature of a fund flow statement is that it does not disclose the asset and liability standing of the business. Instead, a fund flow statement shows the sources and funds used during a financial year. So, by looking at the fund flow statement, one can check only the working capital and not the company’s financial standing.
- In the case of a company where working capital and short-term financing remain concerned, a fund flow statement is more relevant than other financial statements like a profit and loss account or balance sheet.
- As the fund flow statement indicates changes in financial standing over a while, it is more dynamic than a balance sheet that shows a company’s financial position on a specific date.
- Another significant feature of a fund flow statement is that companies can use them with other financial reports, like a profit and loss statement, balance sheet, and a cash flow statement, and get the most suitable analysis.
What Are Some Uses of a Fund Flow Statement?
Applications of the fund in a company are characterized by a reduction in liability and an expansion in assets. The primary uses of fund flow statement are as follows:
- Funds lost in company operations
- Redemption of company’s preference share capital
- Redemption of debentures
- Repayment of long term loans and advances
- Acquisition of long term loans
- Non-trading expenditures
- Acquisition of long term investments
- Payment of tax
- Payment of dividends
- A rise in working capital (according to the schedule of changes in working capital)
Importance of Fund Flow Statement
A fund flow statement is beneficial in assessing a company’s growth, its resulting financial requirements, and determining the most suitable way of financing these demands. Here are some of the reasons that indicate the importance of a fund flow statement.
Helps in analyzing financial operations
The financial statements indicate the net outcome of different transactions on a company’s financial and operational position. It is where the fund flow statement comes in handy and helps companies get a clear perspective of the changes in the assets and liabilities.
Helps in the creation of a realistic dividend policy
Sometimes, even when a company holds sufficient profits for distribution as dividends, they still do not distribute it due to a lack of cash. In such circumstances, a fund flow statement assists in creating a realistic dividend policy.
The Bottom Line
To sum up, we can say that every modern company should frequently evaluate its fund flow statement with other financial reports like a balance sheet and a profit and loss statement. Assessing these statements helps remain financially sound and understand the economic well-being of the company.