What is Fund Flow Statement? How to Calculate it?

Managing working capital and funding effectively is essential for any business. It is vital to keep a tab on the inflow and outflow of funds in the business. A funds flow statement is a document that helps identify the sources of funds that come into a company and how those funds are used. Let us understand what is funds flow statement and how it is calculated.

 

A fund flow statement is a type of financial statement that shows the sources and uses of funds over a given period. It is an essential tool for financial analysis because it provides insights into a company's financial health and ability to generate and use cash. 

The fund flow statement is prepared by comparing the balance sheets of two consecutive periods. 

This is what a fund flow statement looks like -

In 2022-2023, the company generated a positive cash flow from all three categories of activities: Statement of sources and application of funds, Net Increase / Decrease in Working Capital, and Fund From Operations. 

The positive cash flow is a good sign, as it indicates that the company can generate enough cash from its operations to fund its investments and repay its debt. 

The net cash flow from operating activities is the most significant component of the fund flow statement. This indicates that the company generated a healthy amount of cash from its core business operations.

The net cash flow from investing activities is positive, which means that it invested more cash in assets than it sold or received from the sale of assets.  

The net cash flow from financing activities is also positive, which means that the company raised more cash from debt or equity than it repaid.  

The company generated a positive cash flow from financing activities in 2021-2022 but a negative one from operating and investing activities. This is not a good sign, as it indicates that the company relies on external financing to fund its operations and investments.

The negative cash flow the company witnessed in 2021-2022 was a big concern, as it needs to generate more cash from its sales to cover its costs. The negative cash flow from investing activities is also a concern, as the company invests more cash in assets than it receives from selling assets.  

Components of Fund Flow Statement

The main components of a Fund Flow Statement are:

• Sources of Funds
• Applications of Funds

Sources of Funds

Sources of funds section of the Fund Flow Statement represents the inflow of funds or the sources from which funds have been generated. It includes the following components:

1. Net Profit or Loss from Operations: This is the net income generated from the company's core business operations and is a primary source of funds.
2. Depreciation: Although not an actual cash expense, depreciation is also added because it represents a non-cash expense that reduces the net profit.
3. Issue of New Shares or Debentures: Funds raised through the issuance of new equity shares or debentures represent an inflow of funds.
4. Sale of Non-Current Assets: Funds generated from the sale of long-term assets, such as property or investments, are included as sources of funds.
5. Decrease in Working Capital: Reducing the company's working capital (current assets minus current liabilities) is also a source of funds.

Applications of Funds

This section of the Fund Flow Statement represents the outflow of funds or the uses to which funds have been applied. The application of funds includes - 

1. Investing activities: Funds used for acquiring long-term assets, such as property, plant, and equipment, are considered applications of funds.
2. Repayment of Long-Term Debt: Payments made to reduce long-term debt obligations are considered uses of funds.
3. Payment of Dividends: Dividend payments to shareholders represent an outflow of funds.
4. Increase in Working Capital: An increase in working capital resulting from an increase in current assets or a decrease in current liabilities indicates an application of funds.
5. Redemption of Shares or Debentures: Funds used to buy back or redeem shares or debentures are considered applications of funds.
6. Change in Cash and Cash Equivalents: This section summarises the net change in cash and cash equivalents during the period. It combines the sources and applications of funds to calculate the overall change in cash and cash equivalents.
7. Closing Cash and Cash Equivalents: This is the ending balance of cash and cash equivalents after considering the net change during the period.

How to Generate a Fund Flow Statement?

Here are the steps to create a Fund Flow Statement:

Step 1: Gather Financial Information:

Collect the necessary financial information, such as the company balance sheets for a given accounting period and relevant income statements like net income, depreciation and amortization, non-cash expenses, etc.

Step 2: Identify Sources and Applications:

Determine the sources from which funds have been generated and the applications to which funds have been put during the period. 

Step 3: Calculate Net Change in Working Capital:

Calculate the net change in working capital. This change should be reflected in either the sources or applications of funds section.

Step 4: Prepare a Schedule of Changes:

Create a schedule or worksheet to calculate the net change in each component of sources and applications of funds.  

Step 5: Calculate the Net Change in Funds:

Calculate the net change in funds by subtracting the total applications of funds from the total sources of funds. 

Step 6: Prepare the Fund Flow Statement:

Organize the information into a Fund Flow Statement format. The statement consists of two main sections: "Sources of Funds" and "Applications of Funds," with the net change in funds being the difference between the two.

Conclusion

Fund flow statements are a valuable tool for understanding a company's financial performance and ability to generate and use cash. Fund flow statements can be prepared on a monthly, quarterly, or annual basis. They can be used by investors, creditors, management, and financial analysts to make informed decisions.