9 Sep, 2025
4 mins read
Understanding a company’s financial health requires more than just a look at profits. Two key tools that provide deeper insights into business finances are the cash flow statement and the fund flow statement. While both track financial movements, they serve different purposes and are useful for different types of analysis.
In this blog, we'll explore what each statement means, how they differ, and their respective advantages and disadvantages.
A fund flow statement highlights the changes in a company's financial position between two balance sheet dates. It tracks the movement of working capital-defined as current assets minus current liabilities-by analysing the sources and uses of funds over a particular period.
This statement helps stakeholders understand how a business raises capital (sources) and where it spends it (uses), offering a long-term view of financial strategy. Fund flow is especially useful in assessing a company's capacity to manage operations and expansion over time.
A cash flow statement details the actual inflows and outflows of cash and cash equivalents during a specific accounting period. It is divided into three key sections:
Operating Activities: Cash from day-to-day business operations
Investing Activities: Cash used in or generated from investments and asset purchases
Financing Activities: Cash from issuing shares, borrowing funds, or repaying obligations
This statement offers a short-term perspective of liquidity and is vital for understanding a firm’s ability to meet its immediate financial obligations.
Here’s a clear comparison of the two statements:
|
Feature |
Cash Flow Statement |
Fund Flow Statement |
|---|---|---|
|
Purpose |
Tracks cash inflows and outflows |
Tracks changes in working capital |
|
Time Frame |
Short-term (daily, monthly, or annually) |
Long-term (typically yearly) |
|
Basis |
Cash basis |
Accrual basis |
|
Focus |
Liquidity and cash position |
Financial planning and fund management |
|
Utility |
For assessing daily financial health |
For analysing strategic financial decisions |
|
Mandatory under Law |
Yes (Companies Act, 2013 in India) |
No, used for internal analysis |
A cash flow statement offers several benefits:
Real-time insight: It provides an immediate picture of the company’s cash position.
Helps in liquidity planning: Crucial for managing working capital effectively.
Useful for investors and lenders: Indicates the company's ability to pay dividends or repay loans.
Tracks operational efficiency: Highlights whether the company can generate cash from its core operations.
Despite their utility, cash flow statements have limitations:
Ignores non-cash transactions: Depreciation, credit purchases, and other non-cash items are excluded.
Short-term view only: It doesn't reflect the long-term financial strategy or sustainability.
Can be manipulated: Cash flows can be influenced through short-term actions like delaying payments or accelerating collections.
The fund flow statement plays a valuable role in strategic financial analysis:
Long-term planning tool: Offers insights into a company’s financing and investing patterns.
Analyses fund usage: Helps detect inefficiencies in fund allocation.
Supports decision-making: Useful for capital budgeting and project financing decisions.
Tracks working capital: Enables better understanding of operational sustainability.
However, fund flow statements come with certain drawbacks:
No real-time data: Since it uses balance sheet comparisons, the data is historical.
Less useful for liquidity management: It doesn't show immediate cash availability.
Not mandatory: Hence, not all companies prepare it regularly.
Complexity in preparation: Requires detailed analysis of balance sheet items and adjustments.
Both cash flow and fund flow statements serve vital but distinct purposes in financial analysis. While the cash flow statement is essential for monitoring day-to-day liquidity, the fund flow statement is better suited for long-term planning and analysing capital structure changes.
Understanding the differences between these two reports helps stakeholders make informed decisions. Rather than choosing one over the other, many companies use both to gain a full picture of their financial health.
The cash flow statement is more suitable for short-term analysis. It shows how much actual cash is available and whether a company can meet its short-term liabilities. Fund flow focuses on long-term changes in financial position and working capital, making it less effective for immediate planning.
No, a fund flow statement is not mandatory under Indian law. In contrast, a cash flow statement is required under the Companies Act, 2013 for certain companies. However, many businesses still prepare fund flow statements internally for better strategic analysis.
Yes, companies often use both statements in tandem. While the cash flow statement helps manage liquidity and daily operations, the fund flow statement supports long-term planning and capital allocation decisions. Together, they provide a comprehensive view of financial health.
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