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Funds Flow Statement

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Geetanjali Lachke

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Understand how a Funds Flow Statement tracks the movement of funds and explains changes in working capital.

A Funds Flow Statement is an important financial analysis tool that explains the movement of funds within a business between two balance sheet dates. It highlights how funds are generated and where they are applied, helping stakeholders understand changes in a company’s working capital and long-term financial position. Unlike profit-based statements, it focuses on the sources and uses of funds rather than income and expenses.

What Is a Fund Flow Statement

A Fund Flow Statement is a financial statement that shows the inflow and outflow of funds during a specific accounting period. Here, the term “fund” generally refers to working capital, which is the difference between current assets and current liabilities. The statement explains how a company has obtained funds and how those funds have been utilised.

It bridges the gap between the balance sheets of two consecutive periods by identifying transactions that affect the company’s financial structure but are not visible in the profit and loss account alone.

Fund Flow Statement Definition

A fund flow statement can be defined as a statement that analyses changes in the financial position of a business by identifying the sources from which funds are raised and the uses to which these funds are applied during a given period. It helps in understanding the reasons behind changes in net working capital.

Types of Foreign Portfolio Investment

Foreign portfolio investment can be broadly classified into the following categories:

  • Equity Investments: Investment in shares of listed companies

  • Debt Investments: Investment in government bonds, treasury bills, and corporate debt

  • Hybrid Instruments: Exposure through mutual funds, ETFs, or structured products

  • Derivatives Exposure: Participation through futures and options within regulatory limits

Each type carries different risk and return characteristics depending on market conditions.

Foreign Portfolio Investment in India

In India, foreign portfolio investment is regulated primarily by the Securities and Exchange Board of India (SEBI). Foreign investors participate through registered Foreign Portfolio Investors (FPIs), which include pension funds, mutual funds, hedge funds, and sovereign wealth funds. FPIs invest heavily in Indian equities and debt markets, contributing to market depth and liquidity. India’s growing economy, corporate sector, and developing capital markets have led to increased participation by global portfolio investors.

Fund Flow Statement Format

A fund flow statement presents a structured overview of a company’s sources and uses of funds over a period.

Section Description Examples

Sources of Funds

Activities that generate funds for the company

Issue of shares/debentures, long-term loans, sale of fixed assets, funds from operations

Application (Uses) of Funds

Activities where funds are deployed

Purchase of fixed assets, repayment of loans, payment of dividends, increase in working capital

Objectives of Fund Flow Statement

The fund flow statement provides a structured view of a company’s financial movements and long-term planning needs:

  • Assess changes in working capital: Helps management understand fluctuations in current assets and liabilities over time.

  • Identify sources and uses of funds: Highlights where funds are generated from and how they are applied in business operations.

  • Support long-term financial planning: Facilitates forecasting and allocation of resources for strategic growth.

  • Evaluate financing and investment decisions: Assists in judging the effectiveness of borrowing, lending, and capital expenditure choices.

  • Assist management in effective fund management: Provides insights for optimising liquidity and reducing financial bottlenecks.

Importance of Fund Flow Statement

A fund flow statement is important for understanding financial stability and operational efficiency:

  • Shows whether funds are used efficiently: Reveals the company’s ability to allocate resources effectively.

  • Highlights reliance on internal vs external financing: Indicates dependence on internal accruals versus borrowed funds.

  • Helps investors and creditors evaluate long-term solvency: Provides transparency for assessing repayment capacity and financial health.

Uses of Fund Flow Statement

Fund flow statements are practical tools for financial analysis, strategic planning, and benchmarking:

  • Analyse past financial performance: Examines historical trends in fund generation and utilisation.

  • Plan future funding requirements: Supports decisions for upcoming investments or debt obligations.

  • Evaluate impact of business decisions on working capital: Measures how operational and strategic actions affect liquidity.

  • Compare financial management practices across companies: Enables benchmarking to identify effective practices and areas for improvement.

Limitations of Fund Flow Statement

While fund flow statements are useful for long-term analysis, they have certain constraints:

  • Ignores direct cash transactions: Does not track cash inflows and outflows in real time.

  • Does not reflect short-term financial changes: Focuses on long-term fund movements rather than day-to-day liquidity.

  • Based on historical data: Analysis depends on past financial statements and may not predict future trends accurately.

  • Cannot replace cash flow statements: Provides complementary insights but does not show cash position directly.

  • May not show real-time liquidity: Investors and management cannot rely solely on fund flow for immediate cash requirements.

Preparation of Fund Flow Statement

A structured approach ensures accuracy and meaningful insights:

  • Prepare comparative balance sheets: Analyse changes in assets and liabilities over the period.

  • Calculate changes in working capital: Determine increases or decreases in current assets and liabilities.

  • Determine funds from operations: Identify net funds generated from operating activities.

  • Identify sources of funds: Highlight inflows from borrowings, equity, or asset sales.

  • Identify applications of funds: Track outflows such as investments, debt repayment, or capital expenditure.

  • Prepare the final fund flow statement: Consolidate all information to present a clear picture of fund movements.

Advantages of Fund Flow Statement

Fund flow statements support strategic financial management and informed decision-making:

  • Assists in long-term financial analysis: Provides insights into fund generation and utilisation patterns.

  • Enables effective fund management: Helps allocate resources efficiently and maintain liquidity.

  • Improves management decision-making: Assists in making strategic investment, financing, and operational decisions.

  • Reveals financing and investment patterns: Highlights trends in debt, equity, and capital expenditure.

  • Useful for creditors and investors: Offers transparency and aids in evaluating the company’s financial health.

Fund Flow Statement Problems

Errors during preparation can reduce reliability and mislead analysis:

  • Misclassification of current and non-current items: Leads to inaccurate assessment of fund sources and applications.

  • Incorrect working capital calculation: Distorts the understanding of liquidity changes.

  • Misinterpretation of funds from operations: May result in wrong conclusions about financial performance.

Significance of Fund Flow Statement

The fund flow statement provides insights beyond standard financial reports:

  • Supports strategic financial planning: Helps plan future investments and financing requirements.

  • Highlights strengths and weaknesses: Reveals areas of financial efficiency and potential risks.

  • Enhances transparency in reporting: Improves understanding for investors, creditors, and management stakeholders.

Conclusion & Key Takeaways

The Funds Flow Statement is a valuable analytical tool that explains how funds move within a business over a period. It complements other financial statements by focusing on sources and applications of funds, aiding management, investors, and creditors in understanding long-term financial health and decision-making.

Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What is a fund flow statement?

A fund flow statement shows the sources and uses of funds over a specific period. It highlights how working capital changes, identifying the origin of funds and the areas where they are applied within a company.

A fund flow statement is prepared by analysing comparative balance sheets, calculating changes in working capital, determining funds from operations, and classifying all sources and uses of funds during the reporting period.

The fund flow statement is important for assessing a company’s financial position, planning long-term funding, and understanding how efficiently resources are utilised. It helps stakeholders evaluate operational and financing decisions over time.

Fund flow statements assist in financial planning, enhance fund management, and support investors and creditors in evaluating how resources are generated and deployed. They provide a structured view of financial activities and capital movements.

Fund flow statements do not provide detailed cash flow information, overlook short-term liquidity changes, and cannot reflect real-time cash positions. They focus on overall fund movement rather than immediate operational cash availability.

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Hi! I’m Geetanjali Lachke
Financial Content Specialist

Geetanjali is an emerging content writer with a passion for writing and marketing. She focuses on crafting clear, engaging blog posts and articles that simplify complex topics, particularly in finance and business. Geetanjali is dedicated to delivering insightful content that helps readers understand and navigate critical concepts, empowering them to make informed decisions and stay ahead in the ever-evolving landscape of finance and business.

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