{"id":3214,"date":"2021-07-14T15:35:27","date_gmt":"2021-07-14T10:05:27","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=3214"},"modified":"2022-02-10T15:57:22","modified_gmt":"2022-02-10T10:27:22","slug":"2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/","title":{"rendered":"2022 Fund Flow Statement &#8211; Meaning, Objectives, How To Prepare and More"},"content":{"rendered":"\n<p>Funds are essential to run and grow a business. During a financial year, a business undertakes various financial transactions wherein funds flow into the business as well as out of it. To track and draw an understanding of the amount of funds that have moved in and out between two financial years, a fund flow statement is prepared.<\/p>\n\n\n\n<p><strong>This article covers:<\/strong><\/p>\n\n\n\n<ul><li><a href=\"#what\">What is a fund flow statement?<\/a><\/li><li><a href=\"#objectives\">Objectives of preparing funds flow statement<\/a><\/li><li><a href=\"#how\">How is a fund flow statement prepared?<\/a><\/li><li><a href=\"#format\">Format of funds flow statement<\/a><\/li><li><a href=\"#uses\">Uses of funds flow statement<\/a><\/li><li><a href=\"#limitations\">Limitations of fund flow statement<\/a><\/li><\/ul>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#What-is-a-fund-flow-statement\" title=\"What is a fund flow statement?\">What is a fund flow statement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Objectives-of-preparing-funds-flow-statement\" title=\"Objectives of preparing funds flow statement\">Objectives of preparing funds flow statement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#How-is-a-fund-flow-statement-prepared\" title=\"How is a fund flow statement prepared?\">How is a fund flow statement prepared?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Format-of-funds-flow-statement\" title=\"Format of funds flow statement\">Format of funds flow statement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Uses-of-funds-flow-statement\" title=\"Uses of funds flow statement\">Uses of funds flow statement<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Liquidity-analysis\" title=\"Liquidity analysis\">Liquidity analysis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Usage-of-funds\" title=\"Usage of funds\">Usage of funds<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Answers-important-questions\" title=\"Answers important questions\">Answers important questions<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Identifying-problem-areas\" title=\"Identifying problem areas\">Identifying problem areas<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Finalising-the-dividend-policy\" title=\"Finalising the dividend policy\">Finalising the dividend policy<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Helps-investors-and-lenders\" title=\"Helps investors and lenders\">Helps investors and lenders<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.tickertape.in\/blog\/2022-fund-flow-statement-meaning-objectives-how-to-prepare-and-more\/#Limitations-of-fund-flow-statement\" title=\"Limitations of fund flow statement\">Limitations of fund flow statement<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\" id=\"what\"><span class=\"ez-toc-section\" id=\"What-is-a-fund-flow-statement\"><\/span><strong>What is a fund flow statement?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A fund flow statement outlines the changes in the financial position of a company between two financial years. It takes into account the balance sheets of two financial years and then assesses how the funds have flown into and out of the business in the two years.&nbsp;The fund flow statement uses the assets and liabilities listed on the balance sheet to analyse the movement of funds. As such, it helps in ascertaining the changes in the company\u2019s working capital between two financial years.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"objectives\"><span class=\"ez-toc-section\" id=\"Objectives-of-preparing-funds-flow-statement\"><\/span><strong>Objectives of preparing funds flow statement<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>While the profit and loss account and balance sheet are the important financial documents of a business, they do not explain the movement of funds. A profit and loss account shows the income and expenses of the business and the net profit or loss. A balance sheet, on the other hand, shows the statement of assets and liabilities.<\/p>\n\n\n\n<p>A fund flow statement, meantime, shows:<\/p>\n\n\n\n<ul><li>From where the funds have come into the business, that is the sources of funds<\/li><li>Where have the funds gone, that is the application of funds<\/li><\/ul>\n\n\n\n<p>The objective of preparing a fund flow statement is, therefore, to gauge these sources and the application of funds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"how\"><span class=\"ez-toc-section\" id=\"How-is-a-fund-flow-statement-prepared\"><\/span><strong>How is a fund flow statement prepared?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Preparation of the fund flow statement is not a lone affair. The statement is preceded by two other statements which are as follows:<\/p>\n\n\n\n<ul><li>Statement of changes in working capital<\/li><li>Computation of funds from operation<\/li><\/ul>\n\n\n\n<p>Once these two statements are prepared, the next step is the preparation of the fund flow statement.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"format\"><span class=\"ez-toc-section\" id=\"Format-of-funds-flow-statement\"><\/span><strong>Format of funds flow statement<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Here\u2019s how a fund flow statement usually looks:<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><strong>Sources of funds<\/strong><\/td><td><strong>Amount<\/strong><\/td><td><strong>Application of funds&nbsp;<\/strong><\/td><td><strong>Amount<\/strong><\/td><\/tr><tr><td>Issue of fresh capital<\/td><td>XXX<\/td><td>Purchase of assets like building, plant and machinery, equipment, investments<\/td><td>XXX<\/td><\/tr><tr><td>New debt financing through loans or debentures<\/td><td>XXX<\/td><td>Repayment of existing liabilities like loan<\/td><td>XXX<\/td><\/tr><tr><td>Funds generated from business operations<\/td><td>XXX<\/td><td>Redemption of debentures<\/td><td>XXX<\/td><\/tr><tr><td>Sale of assets<\/td><td>XXX<\/td><td>Payment of dividends or taxes<\/td><td>XXX<\/td><\/tr><tr><td>Balancing figure (aggregate amount of application of funds &#8211; aggregate amount of sources of funds)<\/td><td>XXX<\/td><td>Balancing figure (aggregate amount of sources of funds &#8211; aggregate amount of application of funds)<\/td><td>XXX<\/td><\/tr><tr><td><strong>Total&nbsp;<\/strong><\/td><td><strong>XXX<\/strong><\/td><td><strong>Total&nbsp;<\/strong><\/td><td><strong>XXX<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p>The total of both sides of the fund flow statement must match each other. This matching is done by entering a balancing figure on either side.<\/p>\n\n\n\n<ul><li>If the funds generated is higher than funds used, the balancing figure is listed on the \u2018Application\u2019 side. This shows a positive inflow of funds and an increase in the working capital amount.<\/li><li>If the funds used is higher than the funds generated, the balancing figure is placed on the \u2018Source\u2019 side. This shows a higher outflow of funds from the business and reduces the working capital amount.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"uses\"><span class=\"ez-toc-section\" id=\"Uses-of-funds-flow-statement\"><\/span><strong>Uses of funds flow statement<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The fund flow statement can be used for multiple purposes:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Liquidity-analysis\"><\/span><strong>Liquidity analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Fund flow analysis helps companies understand if they have a shortage or excess liquidity. Even if the company generates a profit, if the funds used are higher than the funds sourced, the company could face a liquidity crunch which might prove challenging in a bad business cycle.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Usage-of-funds\"><\/span><strong>Usage of funds<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The fund flow statement helps the management understand how the funds are being used. This can give insights into whether short-term funds are being put to long-term use or not, an area that needs to be studied for sound financial management.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Answers-important-questions\"><\/span><strong>Answers important questions<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>A fund flow statement answers various relevant questions regarding funds. For example, using the statement, the following questions can be easily answered:<\/p>\n\n\n\n<ul><li>How did the working capital change?<\/li><li>How were fixed assets financed?<\/li><li>Did the company raise new capital or seek debt financing?<\/li><li>How were the net profits used?<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Identifying-problem-areas\"><\/span><strong>Identifying problem areas<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The statement can help analysts zero in on the problem areas that are hampering the liquidity of the business. By studying the sources and uses of funds, the financial sufficiency, and factors affecting it, can be easily pinpointed.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Finalising-the-dividend-policy\"><\/span><strong>Finalising the dividend policy<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>By assessing the funds at the disposal of the company, the amount of <a href=\"https:\/\/www.tickertape.in\/blog\/cash-dividend-vs-stock-dividend\/\">dividend<\/a> to be distributed and the profits to be retained can be determined.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Helps-investors-and-lenders\"><\/span><strong>Helps investors and lenders<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When businesses seek finance, lenders check the fund flow statement to assess the usage of the funds and whether such usage is optimal or not. Investors can also make informed investment decisions by studying the financial efficiency of the business through fund flow analysis.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"limitations\"><span class=\"ez-toc-section\" id=\"Limitations-of-fund-flow-statement\"><\/span><strong>Limitations of fund flow statement<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Though the fund flow statement has varied uses and is an important financial statement, there are some limitations to it as well. These include the following:<\/p>\n\n\n\n<ul><li>The statement records the movement of funds on a historical basis. As such, it does not present an accurate present-day picture of the business.<\/li><li>The statement focuses only on the movement of funds. The movement of cash is ignored which gives a skewed financial picture of the business.<\/li><li>The fund flow statement cannot give the whole financial view of the business independently. It has to be used with other financial statements for a complete understanding of business finances.<\/li><\/ul>\n\n\n\n<p>As an investor, understand a fund flow statement and assess the statement of the company into which you want to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> in. The statement can give you useful insights into how the company is utilizing its funds and help you make the right investment decision.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A fund flow statement analyses a company&#8217;s cash inflows and cash outflows. Click here to read more about what is fund flow statement, objectives, steps to prepare, advantages.<\/p>\n","protected":false},"author":27,"featured_media":3217,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[8,1750],"tags":[389,387,388,390],"acf":[],"modified_by":"Ayushi Mishra","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/07\/Informative-1-1.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3214"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/27"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=3214"}],"version-history":[{"count":6,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3214\/revisions"}],"predecessor-version":[{"id":6878,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/3214\/revisions\/6878"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/3217"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=3214"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=3214"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=3214"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}