Explained: Cash flow vs fund flow

Mandar Wagh
/ Categories: Knowledge, Fundamental
Explained: Cash flow vs fund flow

Let's understand the concept of Cash Flow and Fund Flow.

Investors consider the cash flow statement as a valuable measure of profitability and the long-term future outlook of a company. Still, many a time, investors aren't able to find the difference between cash flow and fund flow. However, these two are different types of financial statements, which serve different purposes in the business.   

  

In simple words, the cash flow statement depicts the changes in the cash position by explaining cash inflows and outflows for a certain period. On the other hand, the fund flow statement shows changes in the financial position or changes in the working capital of a company.  

  

Cash flow statement is used as a tool for short-term analysis as it discloses inflows and outflows of cash. It is used in the process of cash budgeting. On the other side, the fund flow statement helps in long-term analysis and states the sources & applications of funds. Hence, used as a capital budgeting technique.  

  

The cash flow statement reports the net cash flow, which is the difference between cash inflow and outflow from various activities of the business. There are three main components/activities: 

  • Operating activities: This component mainly highlights the increase or decrease in current assets and liabilities. It is related to cash generated by the company’s core business activities and includes transactions related to the sale of goods or rendering of services, cash received from customers, interests & taxes paid, etc.  
  • Investing activities: Cash generated and spent on investment-related activities e.g. proceeds from the sale of assets, purchases of non-financial assets, payment of long-term investment, etc.  
  • Financing activities: It tells how much cash is used to fund the company’s capital. It measures the flow of cash between a firm and its creditors. It generally includes proceeds from the issue or redemption of shares and debentures, dividends paid, interests paid or received, etc.      For understanding the fund flow statement, we need to prepare the statement of changes in working capital and the statement of funds from operations. Statement of changes in working capital helps to measure the increase or decrease in current assets and current liabilities. It ultimately shows a net increase or decrease in the working capital during a period.  
  • Increase in current assets/decrease in current liabilities- increases working capital  
  • Decrease in current assets/increase in current liabilities- decreases working capital      A fund flow statement is prepared to analyse the reasons for changes in the financial position of a company between two balance sheets. It states sources of funds (funds availed from owners & outsiders) and applications of funds (funds utilised in creation of fixed assets or for repayment of loans & expenses).    One should have clarity on the concept of cash flow and fund flow statement as it is fundamental to the discipline of accounting and helps investors a lot in assessing the company's financial performance and abilities to grow! 
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