What is a Fund Flow?
Fund flow is known as the net calculation of the inflow and outflow of all the financial transactions and assets. You can usually make the calculations of fund flow on a monthly and quarterly basis.
Such performances on funds or assets are not recorded in the account. However, the outflows, inflows, purchase share, and redemptions. It gives an extra hand to managers where they can invest and get theoretically created demand such as bonds and stocks.
Three Steps of Preparation of Fund Flow Statement:
Step #1: Prepare the working capital change statement:
It is the statement that shows a net decrease or increases in the working capital throughout the year or within the business.
The working capital automatically increases in two situations:
- If there is a sudden increase in current liabilities
- When there is a sudden decrease in current assets
Further, no amendments in the working capital will be seen for the payments that are made to bills payable or creditors, bills receivable, or debtors. Here, goods are sold and purchased on credit only.
Step #2: Determine funds in your day to day operations:
Operational funds refer to the loss incurred or profit earned from regular business operations. This is a key step and a vital point for the preparation of a statement of the fund flow.
Step #3: Preparation of Fund Flow Statement:
Once the loss or funds are recognized in the operations, it’s time to prepare the fund flow statement. It will give you an idea of the net decrease or increase in the working capital.
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Sources of Funds
Items to show under the head Sources of Funds are as follows:-
- Issue of Shares and Debentures for Cash
- Long Term Loans
- Sale of Investments and other Fixed Assets
- Funds from Operations
- The decrease in Working Capital
Application of Funds
Items to show under Application of Funds are as follows:-
- Purchase of Fixed Assets and Investments:
- Redemption of Debentures, Preference Shares, and Repayment of Loan
- Payment of Dividend & Tax
- Increase in Working Capital
Uses of Fund Flow Statements
A fund flow statement is a type of inflow and outflow disclosure that the company has also experienced. The forum works in such a way that to provide information on the fund flow activity that is not ordinary, higher outflow, or irregular expenses that you might carry out in the fund flow. These transaction types come under various transaction to help you track certain activities and changes that you carry forward
Changes in the Fund Flow
If there is any change in the fund flow, the customer sentiments get often reflected. Certain changes usually occur when there comes any improvement or product release, company shifts, or the latest news comes out in the public domain as a whole. The positive fund flow either lessens the outflow or upswings the inflow or the combination of both. Whereas, the things go in contrast to that, lower inflow and higher outflow or both.
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What are the advantages of a Fund Flow Statement?
1. It shows you the changes done in the company’s financial position
2. Image of company
3. Level of the working capital
4. Budget projections
5. Future Business
6. Reasons for the changes in the Financial Position.
What are the disadvantages of the Fund Flow Statement?
2. Everything is based on the Historical Data
3. Not able to use on the basis of Standalone
4. Lack of Originality
5. It goes hand in hand with cash flow statements
Difference between the Fund Flow Statement and Cash Flow Statement?
1. Fund Flow Statement is used for Long term financial planning. But a Cash Flow Statement is used for finding and correcting the problems.
2. Fund Flow Statement is based on the Accrual system accounting. Cash Flow Statement is based on transactions affecting cash or cash equivalents.