Funds Flow Analysis
Another important tool in the hands of finance managers for ascertaining the changes in financial
position of a firm between two accounting periods is known as funds flow statement. Funds flow
statement analyses the reasons for change in financial position between two balance sheets. It
shows the inflow and outflow of funds i.e., sources and application of funds during a particular
period.
Fund Flow Statement summarizes for a particular period the resources made available to
finance the activities of an enterprise and the uses to which such resources have been put. A
fund flow statement may serve as supplementary financial information to the users.
Meaning of Fund: ‘Fund’ means working capital. Working capital is viewed as the difference
between current assets and current liabilities. If we see balance sheets of a company for two
consecutive years, we can note that working capital in such Balance Sheets are different.
Example: Let us see the Balance Sheets of a company for the year ended 31st March, 2013
and 2014.
(Rupees in Lacs)
Current Assets, Loans and Advances: 31.3.2013 31.3.2014
Inventories 15,24 14,91
Sundry Debtors 1,26 1,83
Cash and Bank 1,34 1,66
Other current Assets 8 9
Loans and Advances 11,76 14,74
29,68 33,23
Less: Current Liabilities and Provisions:
Liabilities 17,76 14,83
Provision for Taxation 6,22 7,45
Proposed Dividend 65 2,07
24,63 24,35
Working Capital 5,05 8,88
From the given figures, we find that working capital has increased by ` 383 Lacs. What are the
reasons of such increase?
Fund Flow Statement explains the reasons for such change.
Funds may be compared with water tank. It contains a particular water level to which there is
inflow of water as well as outflow. If inflow is more than outflow water level will go up and if
, outflow is more than inflow then water level will come down.
Similarly, there is a particular fund level at the Balance Sheet date. Throughout the year there
are fund inflows and outflows. So fund experiences a continuous change through the year. At
the end of the year, i.e., at the next balance sheet date fund stands at a particular level. If we
want to measure the difference between the two dates i.e. Working capital in the first Balance
sheet date and Working capital at the next Balance sheet date. This will be given by the
differences of the Total Fund Inflows and Total Fund Outflows.
Change in Working Capital: Even when a firm is earning adequate profit it may be short of
fund for day to day working. Such a situation may be the result of:
(a) Purchase of fixed assets or long-term investments during the phase of extension without
raising long-term funds by issue of shares or debentures;
(b) Payment of dividends in excess of profits earned;
(c) Extension of credit to the customers;
(d) Holding larger stock to the current levels; and
(e) Repaying a long-term liability or redemption of preference shares without raising long-term
resources.
Conversely, even in a year of loss, working capital may not diminish as much as the amount of
loss less depreciation due to many reasons. Change in Working Capital Statement is usually
prepared to show any change in working capital between two consecutive Balance Sheet dates.
Example: Given below is the Change in Working Capital Statement of the same company as
an example:
Change in Working Capital Position
(Rupees in Lacs)
Current Assets, Loans & Advances 31.3.2013 31.3.2014 Change
Inventories 15,24 14,91 – 33
Sundry Debtors 1,26 1,83 + 57
Cash and Bank 1,34 1,66 + 32
Other Current Assets 8 9 +1
Loans and Advances 11,76 14,74 + 298
29,68 33,23 355
Less : Current Liabilities and Provisions
Liabilities 17,76 14,83 – 293
Provision for Taxation 6,22 7,45 + 123
Proposed Dividend 65 2,07 + 142
24,63 24,35 – 28
Working Capital 505 888 383
= [355 – (–28)]
Another important tool in the hands of finance managers for ascertaining the changes in financial
position of a firm between two accounting periods is known as funds flow statement. Funds flow
statement analyses the reasons for change in financial position between two balance sheets. It
shows the inflow and outflow of funds i.e., sources and application of funds during a particular
period.
Fund Flow Statement summarizes for a particular period the resources made available to
finance the activities of an enterprise and the uses to which such resources have been put. A
fund flow statement may serve as supplementary financial information to the users.
Meaning of Fund: ‘Fund’ means working capital. Working capital is viewed as the difference
between current assets and current liabilities. If we see balance sheets of a company for two
consecutive years, we can note that working capital in such Balance Sheets are different.
Example: Let us see the Balance Sheets of a company for the year ended 31st March, 2013
and 2014.
(Rupees in Lacs)
Current Assets, Loans and Advances: 31.3.2013 31.3.2014
Inventories 15,24 14,91
Sundry Debtors 1,26 1,83
Cash and Bank 1,34 1,66
Other current Assets 8 9
Loans and Advances 11,76 14,74
29,68 33,23
Less: Current Liabilities and Provisions:
Liabilities 17,76 14,83
Provision for Taxation 6,22 7,45
Proposed Dividend 65 2,07
24,63 24,35
Working Capital 5,05 8,88
From the given figures, we find that working capital has increased by ` 383 Lacs. What are the
reasons of such increase?
Fund Flow Statement explains the reasons for such change.
Funds may be compared with water tank. It contains a particular water level to which there is
inflow of water as well as outflow. If inflow is more than outflow water level will go up and if
, outflow is more than inflow then water level will come down.
Similarly, there is a particular fund level at the Balance Sheet date. Throughout the year there
are fund inflows and outflows. So fund experiences a continuous change through the year. At
the end of the year, i.e., at the next balance sheet date fund stands at a particular level. If we
want to measure the difference between the two dates i.e. Working capital in the first Balance
sheet date and Working capital at the next Balance sheet date. This will be given by the
differences of the Total Fund Inflows and Total Fund Outflows.
Change in Working Capital: Even when a firm is earning adequate profit it may be short of
fund for day to day working. Such a situation may be the result of:
(a) Purchase of fixed assets or long-term investments during the phase of extension without
raising long-term funds by issue of shares or debentures;
(b) Payment of dividends in excess of profits earned;
(c) Extension of credit to the customers;
(d) Holding larger stock to the current levels; and
(e) Repaying a long-term liability or redemption of preference shares without raising long-term
resources.
Conversely, even in a year of loss, working capital may not diminish as much as the amount of
loss less depreciation due to many reasons. Change in Working Capital Statement is usually
prepared to show any change in working capital between two consecutive Balance Sheet dates.
Example: Given below is the Change in Working Capital Statement of the same company as
an example:
Change in Working Capital Position
(Rupees in Lacs)
Current Assets, Loans & Advances 31.3.2013 31.3.2014 Change
Inventories 15,24 14,91 – 33
Sundry Debtors 1,26 1,83 + 57
Cash and Bank 1,34 1,66 + 32
Other Current Assets 8 9 +1
Loans and Advances 11,76 14,74 + 298
29,68 33,23 355
Less : Current Liabilities and Provisions
Liabilities 17,76 14,83 – 293
Provision for Taxation 6,22 7,45 + 123
Proposed Dividend 65 2,07 + 142
24,63 24,35 – 28
Working Capital 505 888 383
= [355 – (–28)]
