Understanding Fund Flow Statement: An important business tool
Hey there! TallyDekho is here to make you understand one of the most important management tools of the business, Fund Flow Statement, revealing its significance in the business and related areas.
In every business entity, there is n number of financial statements that are prepared by the concerned persons. And every single statement reveals something. Profit & Loss statement and Balance Sheet are the most basic statements that tell about the business soundness and financial soundness as well. However, there are several other statements like common-size statements and comparative statements that show the financial position of the concern at present. Similarly, the fund flow statement is a statement that tells about the sources and application of funds in a business.
Funds can be:
- Cash or cash equivalents
- Current Assets less Current Liabilities i.e, Net Working Capital
- Total funds
- Equity Capital
- Reserves
Let us understand the term fund flow separately. In layman’s language, the ‘Fund’ can be described as ‘cash or cash equivalents’. But technically, Fund means the net working capital of the business. Here the term ‘Flow’ means ‘Transfer’.
It implies this statement tells about the inflow and outflow of the funds during a financial year. In other words, Fund Flow Statement is an analytical statement prepared for comparative purposes between two consecutive years.
Objective
- The main objective of preparing Fund Flow Statement is to portray the sources of funds and their possible uses to which they can be put.
- The second main objective is to check the availability of the funds for business needs and their possible deployment to make the best use of the available funds.
Structure of Fund Flow Statement
As the fund flow statement tells us about the inflow and the outflow of the funds in the business, its structure also consists of two parts:
- Inflow of funds
- Outflow of funds
This statement can be prepared in two formats:
- Statement Form
- T-form
Secondly, the entire statement is broadly classified into two parts namely, Sources of funds and Application of funds. All the funds received from business operations, sale of fixed assets and investments, issue of shares and debentures, long-term borrowing from financial institutions, and decrease in working capital are covered in ‘Sources of Funds’ head.
On the other hand, Funds used in paying the dividend, tax, purchase of fixed assets, repayment of long-term loans, the redemption of debentures and preference shares, increase in working capital, all come under ‘Application of Funds’ head.
Importance of Fund Flow Statement in business
The overall structure and format of the fund flow statement clearly tell us how important the fund flow statement is for any business. However, there are several other advantages as well. Below are some of them:
Analyzing hand for business
Fund Flow Statement can be known as ‘analyzing hand’ for the business as it helps to analyze the fund requirement and how to utilize the available funds in the most appropriate manner.
Optimum utilization of the available funds
The funds used best will yield the best. The Fund Flow Statement shows the deployments of funds and in this way, it helps the business in making the best decision for optimum utilization of the funds.
Management of Working Capital
The statement tells about the working capital changes as well. This ensures the availability of working capital for day-to-day operations of the business. However, a complete article is there to understand working capital management in detail.
Helps in generating long-term financing for business
The Fund Flow Statement reveals the actual long-term financing the business has already pursued. This gives the business an idea of the next long-term financing prospects to be undertaken.
Easy identification of threat factor in business
The statement reveals all the major categories of funds sources and application. This helps in easy identification of threats in business funding wherein taking corrective measures becomes easy.
Helps in future forecasting
The Fund Flow Statement acts as a future guide for business as it depicts the fund statement for the two consecutive years. Hence, it helps in making future forecasts about funds requirement and gives an idea of the fund allocation.
Reveals about the exact creditworthiness of the business
This statement reveals the fund utilization of the business and the availability of funds for paying off the obligations. This showcases the exact creditworthiness of the business.
In this way, the fund flow statement plays a vital role in business being one of the most important business tools of decision making. Stay connected for more interesting articles. Feel free to share your feedback.
