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What are funds flow statement?
A funds flow statement is a statement that tracks how much working capital has been accumulated and how it was spent. These statements can help analyse the trial balance and the changes in the variation of working capital over some time, such as a month or a quarter.
If you want to learn more about the calculation of trial balance then click here. The focus of a funds flow statement is to show what projects have contributed to the growth or decline in working capital, and where a business needs improvement. Hence to put it simply it shows the inflow (source of money) and outflow (places where the money has been spent).
The funds flow statement may also be known as a statement of cash flow under certain situations. However, before you learn about how to prepare funds flow statements and the standard funds flow statement format you should get to learn about its many benefits.
What are the main benefits of preparing a funds flow statement?
- The statement shows where a company’s working capital comes from and where it goes between two points in time. Hence it is a summary of the life of working capital.
- Funds flow statement can be used to identify the financial strengths and weaknesses of a business. With this flowcharts can be created to show the strengths and weaknesses of a business, which can then be used to plan for future growth, or to take corrective measures.
- The working capital analysis is a valuable tool for analysing the reasons behind changes in your company’s cash balance.
- Because it compares the beginning and ending amounts of both assets and liabilities, a fund flow statement reveals potential problems early and allows planning for corrective measures. For this, the two balance sheets prepared at the two periods of time are compared.
- Investors may also look at an organization’s ‘Funds Flow Statement‘ to help them decide whether their investment in that organization is a good idea.
- It gives detailed information about a company’s financial health, sources of maximum profit and the current picture of operational efficiency.
- The funds’ flow statement can help a company decide whether it should pay dividends or keep the profits to invest in future projects. Hence it could be fundamental in preparing policies such as a dividend policy, a retention policy, and an investment policy.
- You can use a business’s ‘funds flow statement’ to figure out the financial consequences of its different business transactions.
Now let’s take a quick look at some of the disadvantages of a funds flow statement:
- No information about the cash position
Since the “funds flow statement” doesn’t explicitly state an organization’s cash position, it is important to also prepare and present a “cash flow statement” that will clarify the company’s actual cash position.
- Gives old information
Using a funds flow statement is like looking at an old photograph; the information it provides is no longer up to date. But you can still learn from it by making estimates about the future based on what it tells you.