A fund flow statement refers to a financial document that evaluates the movement of financial resources from one fiscal year to the next.
In simpler terms, this statement helps compare the resources of funds and applications of funds during a specific accounting period, assessing their impact on the organisation’s working capital.
Components of a Fund Flow Statement
There are two main components in this statement:
- Sources of Funds: Where the business's funds come from
- Applications of Funds: How the business's funds are used
Objectives of Fund Flow Statement
The primary objectives are:
- Analysing the business's situation at any point in time helps plan corporate finance efficiently
- Helping business analysts and investors evaluate the company's financial stability and how accumulated funds are being utilised
- Analysing whether the company will be able to pay dividends to the investors and helping in making other dividend-related decisions.
How to Prepare a Fund Flow Statement?
The process typically involves 3 simple steps:
Step 1: First, compare your business's current assets and liabilities to determine the actual increase or decrease in working capital.
Step 2: Then, a Profit and Loss (P&L) account is created to determine 'Funds from Operations.' For that, you need to add back non-cash expenses to the net income and subtract all the non-operating gains.
Step 3: Now, you have a two-sided statement, with all the sources of funds listed on one side and the uses of funds on the other.
The remaining balance should be equal to the total change in working capital, which you calculated in the first step.
However, the fund flow statement format has limitations too. The preparation is based on past financial data, which has the potential to have errors in predicting future performance.
