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Fund Flow Statement

INTRODUCTION

The traditional concept of profit and loss account and balance sheet has a limited role to play in financial analysis. The profit and loss account reflects the results of the business operations for a specified period of time. It takes into account only the expenses incurred and income received during the accounting period. The balance sheet gives a summary of the assets and liabilities at a particular period of time. And at the same time, balance sheet does not explain the details about the movement of funds. In actual practice, a business concern receives funds from various sources and invested in various ways of investment. It is a continuous process. The ultimate aim of the financial management is to study and control these funds in order to maintain the solvency and financial soundness of the firm. For the purpose of complete study of sources and applications of funds over the accounting period, a separate statement is essential to find the periodical increase or decrease of such funds f an enterprise. This statement is called fund flow statement. 

MEANING OF FUND FLOW STATEMENT

The fund flow statement is a statement which reveals the methods by which the usiness has been financed and how it has used its funds between two balance sheet dates.

In the words of Foulke: “A statement of sources and application of funds is a technical

device, designed to analyze the changes in the financial conditions of a business enterprise between two balance sheet dates.” 

DIFFERENT NAMES OF FUND FLOW STATEMENT

A statement of sources and application of funds

A statement of sources and uses of funds

Where Got and where Gone statement

Inflow-outflow of fund statement

Statement of funds supplied and applied; funds received and disbursed statement 

MANAGERIAL USES OF FUND FLOW STATEMENT

Fund flow statement is an invaluable analytical tool for a financial manager for the purpose of evaluating the employment of funds by a firm and also to assess sources of such funds. Following are the important managerial uses of fund flow statement.

1. The foremost use of the fund flow statement is to explain the reasons for changes in the assets and liabilities between two balance sheet dates.

2. Fund flow statement gives details about the funds obtained and used in past. Based upon this detail; manager can take correct actions at appropriate times.

3. Fund flow statement acts as a control device when compared with budgeted figures. It also gives guidance to the finance manager for taking remedial action if there is any deviation.

4. It helps the management to formulate various financial policies-viz dividend, bonus etc.

5. It gives guidance to the management with regard to working capital. Through fund flow statement, management can take proper steps for effective utilization of surplus working capital or in case of inadequacy, suitable arrangement can be made for improving the working capital position.

6. It identifies the strong and weak financial areas of the firm.

7. It gives the answers for various financial intricate questions :

- How much funds were generated?

- How were the funds used?

8. Effective utilization of available resources and scarce resources should be allocated according to the preferential needs.

9. With the help of the fund flow statement, financial and lending institutions can easily evaluate the credit worthiness and repaying capacity of the borrowing company.

10. It enables the management to reformulate the firm’s financial activity on the basis of the statement.