A fund flow statement is a financial statement that shows the inflow and outflow of funds or assets for a company, usually measured on a monthly or quarterly basis. It is an essential factor in revealing how funds are used and serves as a financial parameter that helps a company to control its finance and develop a better strategy for long-term financial planning, and to utilize short-term and long-term funds. The statement comprises two components: sources of funds and application of funds. The sources of funds include where the funds have come from and their source, while the application of funds denotes the usage of funds for short-term and long-term needs. The statement can be used to analyze the changes in a companys financial position between two balance sheet periods and to determine how the funds are being used.
A fund flow statement analysis is a comparison between various aspects of a balance sheet. The statement can reveal the profit or loss of operation, addition in long-term borrowings, and decrease in working capital. It also acts as a guide for management to learn about future financial planning.
The fund flow statement is different from the cash flow statement, which is more comprehensive and details the multiple cash flows of a company, rather than just focusing on working capital. The fund flow statement was required by GAAP between 1971 and 1987, and it was primarily used by accountants to report any change in a companys net working capital during a set period of time.
To prepare a fund flow statement, one has to follow the below steps:
- Determine the opening and closing balances of cash and cash equivalents.
- Determine the changes in working capital.
- Determine the sources of funds.
- Determine the application of funds.
The limitations of a fund flow statement include the fact that it only provides information about changes in working capital and long-term funds and does not show the current financial position of a company. It also does not provide details about the timing or reasons for changes in funds and may not reflect the true liquidity position of a company.
