Funds Flow Statement

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.