FUND FLOW STATEMENT – AN OVERVIEW:
Financial statements are the summarized statements of accounting through which an enterprise communicates accounting information to the external users. It basically includes Income statement, balance sheet and cash flow statement.
The traditional concept of profit and loss account and balance sheet will only reveals the net effect of various transactions on financial position of a company. The profit and loss account takes into account only the expenses incurred and income received during a particular accounting period whereas the balance sheet gives a summary of the assets and liabilities at a particular period of time.
There is a need of another accounting statement that can keep a check on flow of funds that leads to increase or decrease of funds of a firm. Such statement is known as Fund flow statement.
MEANING OF FUND FLOW STATEMENT:
So, fund flow statement is defined as a report on movement of funds. The term fund represents here the ‘working capital’. It is a statement which indicates various means by which the funds have been obtained as well as ways to which these funds have been used between the opening and closing of balance sheet.
FUND FLOW ANALYSIS:
- The flow of fund occur when a particular transaction changes a current account on one hand and a non-current account on the other hand and vice-versa.
- When a change in non-current account is followed by a change in another non-current account, it does not amount to flow of fund.
- Similarly, a change in non-current account followed by a change in another non-current account, does not amount to flow of fund.
SIGNIFICANCE OF FUND FLOW STATEMENT:
Fund flow statement, one of the essential management tool consists of the following significant uses:
Evaluating credit worthiness of the firm:
Lending institutions, before providing credit or loan to the firms, demand fund flow statement of past years as well as projected statement of fund flow for future to determine the repaying capacity of sole-proprietors, business-man, firms and company.
Guidance with regards to working capital:
Fund flow statement helps in accessing the working capital position of a firm and provides ways to improve it. It also provides guidance as how to effectively utilize the excess working capital.
Realistic dividend policy:
Firms may not be able to pay sufficient dividend to its shareholders not because the profits are not sufficient, but due to less available cash. Hence, a proper fund flow statement will keep a check on liquidity position of the firm and helps in forming a realistic dividend policy.
Fund flow statement acts as an important tool for controlling by comparing actual figures with the past figures and hence, taking remedial actions to improve the position of the firm in near future.
Analyzing firm’s financial position:
Fund flow statement explains the reasons for changes in the assets and liabilities between two balance sheet dates and their effects on the operational and financial position of the firm. Hence analyzes firm’s position along with its strong as well as weak points.
Efficient allocation of funds:
Resources of concern are always limited and their efficient allocation is always a problem for the firm. The amount of funds to be available for future projects can be compared to that of its requirement with the help of projected Funds Flow Statement. It prevents the business from becoming a helpless victim of unplanned action.