In
accounting, the term "funds" has two distinct meanings: (1) cash and (2) the access
of current assets over current liabilities, which is called "net working capital." Current
assets refer to anything of value that a company will sell, use, or otherwise obtain cash
for during the current year or operating cycle, whichever is longer, such as cash,
inventories, and debt owed to a company. Current liabilities are obligations a company
owes within the same period, such as money a company owes another party,
insurance, taxes, and wages. Besides these two meanings, the term "funds" also can
refer to a combination of cash and working capital.
The flow of funds, therefore, denotes the earning and spending of cash or the growth
and reduction of working capital—i.e., fund inflows and outflows. Fund inflows include
activities designed to produce revenues, such as selling products, services, investments,
and other company assets, as well as issuing stocks and bonds. On the other hand,
fund outflows include paying wages, obtaining insurance, purchasing company assets
and materials, making long-term investments, and paying dividends and taxes. At one
point, companies gauged their flow of funds by using any definition of funds and
included a financial statement reporting these activities in theirannual reports.
Investors, creditors, and financial managers monitor the flow of funds in order to
determine how effectively management plans and controls the quantity and types of
its resources, how it has invested and plans to invest company resources, and what
methods it uses to finance them. Though once this entailed using the funds statement,
financial statement users now obtain this information largely from cash flow
statements, income statements, and balance sheets. Depending on whether financial
statement users want to analyze cash flow or working capital, they can choose between
the beginning and ending balance sheets of a specific accounting period to evaluate a
company's working capital or the cash flow statement of the same period to evaluate a
company's cash activities. Financial statement users can examine these statements
together to monitor both working capital and cash activities.
Users of financial statements employ comparative analysis of this information over a
number of years to better evaluate a company's performance and to enhance their ability
at predictive decision making. Users analyze the trends to determine the degree to
which funds, derived from operations, contribute to the growth of the company.
In addition, stockholders and creditors find analyzing the flow of funds helpful in
understanding the changes in assets and asset sources. Analyzing the flow of funds helps
stockholders and creditors determine how a company used its additional resources
derived from profitable operations and to identify the financial strengths and
weaknesses of the business. This additional information is essential to evaluating
managerial performance and to making investment decisions. Creditors are more able to
determine how the business uses credit and the debt capacity of the business.
Within a company, managers monitor the flow of funds particularly when planning
and budgeting. From analyzing a series of relevant financial statements over a number
of years, management can project cash requirements needed for growth, identify and
plan the efficient use of idle funds, determine working capital requirements, ease the
impact of insufficient cash balances, and plan the payment of interest to creditors and
dividends to stockholders.
Fund Flow Statement
Fund Flow Statements summarize a firm’s inflow and outflow of funds. Simply put, it tells investors
where funds have come from and where funds have gone. The statements are often used to
determine whether companies efficiently source and utilize funds available to them.
A summary of main points of differences between these two is give below:-
(i) Balance sheet is a statement showing the financial position of the concern on a particular date. The
asset side portrays the development of resources in various type of properties an liabilities side
indicates the manner in which these resources are obtained. It shows all assets and liabilities whether
current or fixed, tangible or intangible etc., while Funds Flow Statement shows the changes in current
assets an current liabilities during a particular period of time.
(ii) Balance Sheet shows the total financial position on a particular date and in this way, it is of a
historical nature an therefor, its utility is very limited for the management. On the other hand, Funds
Flow Statement is a comparative statement of assets and liabilities and depicts the changes in working
capital during the period of two Balance sheets.
(iii) Funds Flow Statement is an analysis and control device for the management. Management can
ensure the long term an the short term solvency of the firm by studying the internal funds flow cycles.
It is a modern technique of knowing the inflows and outflows of funds during a particular period.
Balance Sheet represents the balance of various assets an liabilities and does not present analysis of
any kind.
(iv) There are two views of h financial position of the firm-long term an short-term. Short-term
financial position means the technical solvency of the firm in the near future while on the other hand,
long-term financial position means future financial structure of the firm. Both are inter-relate but there
is a differences in their analysis. The short-term view of the financial position of the firm ca not be had
from the Balance Sheet.
