Fund Flow Statement: Objectives, Importance and Examples

Understanding the movement of funds within a business is crucial for financial planning and decision-making. One of the tools used to analyse these movements is the fund flow statement. While often overshadowed by the cash flow statement, this financial document provides valuable insights into how a company sources and utilises its funds over a given period.

In this blog, we’ll explain what a fund flow statement is, its key objectives, components, and how it differs from other financial statements.

What Is Fund Flow Statement?

A fund flow statement shows the changes in the financial position of a company between two balance sheet dates. Specifically, it tracks the movement of working capital by identifying the sources and uses of funds. Unlike the cash flow statement, which focuses on cash transactions, the fund flow statement looks at all financial resources.

It answers two key questions:

• Where did the funds come from?

• How were the funds used?

This statement is essential for understanding the financial health and operational efficiency of a business.

Objectives of Fund Flow Statement

The fund flow statement serves several strategic objectives:

• Identify financial inflows and outflows: It helps pinpoint how funds are generated and where they are spent.

• Analyse changes in working capital: By tracking the variation in current assets and liabilities, it reveals how operations affect liquidity.

• Aid financial planning: It supports better forecasting by highlighting long-term financial trends.

• Monitor business performance: It helps assess how effectively a company uses its financial resources to grow and sustain operations.

Importance of the Fund Flow Statement

While it may not be part of standard statutory reporting, the fund flow statement is important for both internal and external stakeholders.

Why it matters:

• Financial control: Managers use it to track whether resources are being allocated efficiently.

• Investment analysis: Investors and analysts assess it to evaluate a company’s financial strategy.

• Loan assessment: Banks and lenders rely on it to judge a company’s creditworthiness.

• Strategic decision-making: It supports decisions like expansion, capital budgeting, and restructuring.

What Are the Components of a Fund Flow Statement?

The fund flow statement includes two main parts:

1. Statement of Changes in Working Capital

• Lists current assets and current liabilities

• Calculates the net increase or decrease in working capital

2. Sources and Uses of Funds

• Sources include:

  • Issue of share capital

  • Long-term borrowings

  • Sale of fixed assets

  • Operational income not affecting working capital

• Uses include:

  • Purchase of fixed assets

  • Repayment of loans

  • Payment of dividends

  • Increase in working capital

Example:

Cash Flow Statement vs Funds Flow Statement

While both statements track financial movement, they serve different purposes:

Both are complementary. The fund flow statement offers a broader view of financial health, while the cash flow statement addresses immediate cash positions.

How to Prepare a Fund Flow Statement?

Here are the basic steps to prepare a fund flow statement:

• Prepare comparative balance sheets: Use the data from two consecutive financial years.

• Determine changes in working capital: Prepare a statement of changes in current assets and liabilities.

• Identify sources and applications: Track transactions that affect non-current items.

• Prepare the fund flow statement: List sources on one side and uses on the other to ensure they tally.

How to Read the Fund Flow Statement?

Reading a fund flow statement involves analysing how effectively a business has managed its funds:

• A positive net working capital indicates financial stability and good liquidity.

• If major funds are used for asset creation, it signals long-term growth.

• Rising liabilities or reduced capital could suggest over-reliance on external borrowing.

• Compare profit retained vs funds used to assess operational efficiency.

Limitations of a Fund Flow Statement

Despite its benefits, the fund flow statement has some limitations:

• Does not track cash: It excludes day-to-day cash flow, which can be critical for liquidity.

• Historical in nature: It reflects past transactions, not real-time financial status.

• Ignores non-fund items: Certain accounting entries that don’t impact working capital are not included.

• Requires supporting data: It cannot be prepared in isolation without balance sheets and income statements.

Conclusion

A fund flow statement is a valuable tool for understanding how an organisation manages its financial resources over time. While it may not replace the cash flow statement, it complements it by offering a more strategic and long-term perspective on financial movements.

For business owners, investors, and financial analysts, mastering the fund flow statement can lead to better planning, improved decision-making, and a stronger grasp of a company’s financial operations.