It is a statement showing the movement of funds into and out of business. In other words it is a statement showing sources and application of fund. A fund flow statement deals with the financial resources required for running the business activities. It explains how were the funds obtained and how were they
used.
A fund flow statement matches the funds raised and funds applied during a particular period. The sources and applications of fund may be of capital as well as of revenue nature. A fund flow statements provide a meaningful link between the balance sheets at the beginning and at the end of the period and profit and
loss account of the period. In view of recognized importance of capital inflows and outflows which often involve large amount of money should be reported to stake holders, the fund flow statement is devised.
In the words of Dr. Shailesh Ransariya, “Funds flow statement is a modern technique of analyzing financial statement. Fund flow statement shows as to where have the funds come from and where have they been used during the accounting period. It helps in analyzing the movement of funds of a firm between the two balance sheet dates.”
As per Foulk point of view “A statement of sources and applications of fund is a technical device deigned to analyze the changes in the financial condition of a business enterprise between two dates.”
In the words of Anthony, “The fund flow statement describes the sources from which additional funds were derived and the uses to which these sources were put.”
The I.C.W.A. in glossary of management accounting terms defines fund flow statement as “a statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise. The purpose of this statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”
OBJECTIVES OF FUNDS FLOW STATEMENT:
The main objectives of the fund flow statement are:
(1) Helpful in finding the answer to some important financial question:-
A fund flow statement is prepared to give satisfactory answer to the following question:-
(a) What have been the main source and application of funds during the period?
(b) How much funds have been generated from business operations?
(c) Where did the profits go?
(d) Why where dividends not larger?
(e) How was it possible to distribute dividends in excess of current earning or in the presence of net loss for the period?
(f) Why the net current assets are up even though there is a net loss for the period?
(g) How was the expansion in plant and equipment financed?
(h) How was the repayment of long term debt accomplished?
(i) How was the increase in working capital financed?
(2) Helpful in financial analysis:- A fund flow statement provides a complete analysis of the financial position of a firm.
(3) It provides more reliable figures of profit and loss of the business:- It gives much more reliable figure of the profits of the business than the figures shown by P/L account because the figure of profit shown by P/L account is affected by the personal decision of management in deciding the amount of
depreciation and other adjustments regarding the writing off preliminary expanses etc.
(4) It enables to know whether the funds have been properly used:– The funds flow statement enables the management to know whether the funds have been properly used in purchasing various assets or repaying loans etc.
(5) Helpful in proper management of working capital:- While managing working capital in a business, it becomes essential to ensure that it should neither be excessive nor inadequate. A fund flow statement indicates the excessiveness or inadequacy in working capital.
(6) Helps in preparation of budget for the next period:- A fund flow statement is prepared for next year, it will enable the management to plan its financial resources properly. The firm will know how much funds it requires, how much the firm can manage internally and how much it should arrange from outside source. This is helpful in preparing the budgets for the future period.
(7) It helps a firm in borrowing operations:- A fund flow statement prepared for the future period indicates whether the company will have sufficient funds to repay the interest & loans in time.
(8) Helpful in determining dividend policy: – Sometimes, there may be sufficient profit but the distribution of dividend may not be possible due to its adverse effect on the liquidity and working capital of the business. in such cases a funds flow statement help in leading whether to distribute the
dividend or not because a funds flow statement will reveal from where and how much funds can be managed for distributing the dividends.
(9) Useful to shareholders:- Shareholders also get information about the financial policies of the enterprise with the help of fund flow statement.
SOURCES AND USES (APPLICATIONS) OF FUNDS:
Since a fund flow statement describes the varies sources and uses of funds, it is imperative that one should know the varies sources and uses of funds:
Sources of funds:
Generally funds are derived from:
1. Operating of business i.e. operating income
2. Income from investment
3. Sale of assets
4. Sale of long term investments
5. Contribution of share holders
6. Increase in long term liabilities, e.g., issue of debentures
7. Gifts, damages awarded in legal action etc.
Uses (Applications) of funds:
Generally funds are utilized to:
8. Operating loses
9. Repayment of long term loan and debentures
10. Redemption of preference share capital
11. Payment of cash dividends
12. Purchase of fixed assets
13. Purchase of long term investments
Loss of cash by embezzlement costs in legal action etc.
IMPORTANCE/SIGNIFICANCE OF FUND FLOW STATEMENT:
Fund flow statement is a useful tool in the financial managers’ analytical kit. The basic propose of this statement is to indicate where funds came from and where it was used during certain period. Following are the uses of this which show its importance:
[1] Fund flow statement determines the financial consequences of business operations. It shows how the funds were obtained and used in the past. Financial manager can take corrective actions.
[2] The management can formulate its financial policies – dividend, reserve etc. on the basis of the statement.
[3] It serves as a control device, when comparing with budgeted figures. The financial manager can take remedial steps, if there is any deviation.
[4]Other points:
1. It points out the sound and weak financial position of the enterprise.
2. It points out the causes for changes in working capital.
3. It enables the Bankers, creditors or financial institutions in
assessing the degree of risk involved in granting credit to the business.
4. The management can rearrange the firm’s financing more effectively on the basis of the statement.
5. Various uses of funds can be known and after comparing them with the uses of previous years, improvement or downfall in the firm can be assessed.
6. It provides a basis for preparation budgets for the future.
7. The statement compared with the budget concerned will show to what extent the resources of the firm were used according to plan and what extent the utilization was unplanned.
8. It tells whether sources of funds are increasing or decreasing or constant.
9. It points out the financial strengths and weaknesses of the business.
10. It helps in working capital management of the company.
11. It appraises the shareholders regarding the uses of funds in the business.
LIMITATION OF FUND FLOW STATEMENT:
The main limitations of fund flow statement are as under:
(1) The statement lacks originality because it is only rearrangement of data appearing in account books
(2) It indicates only the past position and not future.
(3) It indicates Fund flow a summary form and it does not showvarious changes which take place continuously.
(4) When both the aspects of a transaction are current, they are not considered.
(6) When both the aspects of a transaction are non- current, even then they are not included in this statement.
(6) It is not an ideal tool for financial analysis.
(7) It is not an original statement but simply a rearrangement of two statements or financial data.
(8) It is not a substitute of income statement or a balance sheet. It is only a supplement to them.
COMPONENTS OF FLOW OF FUNDS:
In order to analyze the sources and application of funds, it is essential to know the meaning and components of flow of funds given below:
(l) Current Assets
(2) Non-Current Assets (Fixed or Permanent Assets)
(3) Current Liabilities
(4) Non-Current Liabilities (Capital & Long-Term Liabilities)
(5) Provision for Tax
(6) Proposed Dividend