The difference between cash flow and fund flow statements constitutes a critical concept in accounting and finance since these statements relate unique insights to the financial health of a company. Both these reports focus attention on movements within the company based on financial aspects, but their objectives, structures, and scopes are pretty different.
In short, the cash flow statement focuses on the inflow and outflow of cash generated within a specific period. On the other hand, the fund flow statement records changes in the working capital position, as well as the long-term activities, over a given time.
What is Cash Flow?
A cash flow statement is a kind of financial statement presenting information on inflows and outflows of cash flows in a company during a given period. It is categorized into three segments: operating activities, investing activities, and financing activities.
Characteristics of Cash Flow Statement:
- Operating Activities: These encompass core business transactions like receipt of cash from cash receipts and payment to suppliers in cash.
- Investing Activities: These involve tracking the purchase and sale of long-term assets, such as purchases and sales of equipment and investments.
- Financing Activities: These include raising or repaying capital through money raised either by issuing shares or repaying loans.
Example of Cash Flow Statement
| Activity Type | Cash Inflow/Outflow |
|---|---|
| Operating Activities | Cash received from sales |
| Investing Activities | Purchase of new machinery |
| Financing Activities | Issuing shares |
What is Fund Flow?
A fund flow statement reveals sources and applications of funds over a period. It generally concentrates on changes in working capital and long-term financing, as it focuses on whether the resources have increased or decreased within operations, investment, and financing categories.
Characteristics of Fund Flow Statement:
- Source of Funds: The source of the cash is either from operating, issued shares or through long-term borrowings.
- Application of Funds: This is the application of the funds in the acquisition of assets, repayment of debt, and dividend payout to shareholders.
- Changes in Working Capital: This aspect, focuses on the movement of changes in current assets and liabilities which describes the net movement in working capital.
Example of Fund Flow Statement
| Source of Funds | Amount (Rs) |
|---|---|
| Long-term borrowings | 1,50,000 |
| Share issuance | 1,00,000 |
| Use of Funds | Amount (Rs) |
|---|---|
| Purchase of assets | 2,00,000 |
| Dividend payment | 50,000 |
Cash Flow vs Fund Flow
| Aspect | Cash Flow Statement | Fund Flow Statement |
|---|---|---|
| Objective | Track cash inflows and outflows. | Track changes in working capital and sources of funds. |
| Scope | Short-term (specific accounting period). | Long-term (capital and fund structure). |
| Focus | Cash and cash equivalents. | Fund movements between assets and liabilities. |
| Basis | Cash accounting. | Accrual accounting. |
| Components | Operating, Investing, and financing activities. | Sources and uses of funds. |
Advantages of Cash Flow Statement
- Liquidity Analysis: A cash flow statement is the advantage of showing the greatest liquidity of a company. By tracking actual inflows and outflows, firms can gauge their ability to pay the short-term obligations that shall be fulfilled immediately, like salary payments to workers, creditors, and suppliers. This further enables the managers and other interested parties to know whether there is sufficient cash to underpin the firm’s running operations.
- Investment Planning and Decision Making: Cash flow statements are critical components of financial investment decisions because they depict the cash that would be available after operational expenses have been incurred. Businesses can use a cash flow statement to plan their capital expenditure, expansion projects, or mergers and acquisitions through precise cash remaining after incurring operational expenses. A cash flow statement is an indicator used by potential investors and lenders to measure the strength of the company’s financial situation before making any decision to make investments.
- Short-Term Indicator of Health: The cash flow statement is an overview of a company’s financial health over a while (monthly, quarterly, or yearly). This would help businesses track inflow and outflows from the company, enabling instant insight into how the business is managing liquidity.
Disadvantages of Cash Flow Statement
- Narrower Scope: Although cash flow statements are ideal for short-term analysis, they provide limited insight into the long-term strategy of raising funds. They can only capture cash transactions during the specified time and thus do not allow the making of any forecast or strategic financial planning.
- Does Not Indicate Profitability: A cash flow statement does not directly indicate the profitability of a company. It can have a firm recording cash flow and at the same time be loss-making since it pays a lot of the expenses as non-cash items like interest and taxes. If it is read in isolation, such a statement may lead to misleading conclusions.
- Considers Only Cash Transactions: The cash flow statement takes account of only cash inflows and outflows and does not factor in receivables or payables for that matter, hence not providing a proper understanding of the creditworthiness of an organization or the overall performance of the same. Hence, this might put the organization in a skewed perspective.
Advantages of Fund Flow Statement
- Helps in Long-Term Financial Planning: One of the crucial benefits of having such a statement is its long-term focus. This account shows how the funds were created and whether they are being utilized for strategic capital investments, paying off loans, or raising equity. Business concerns can, therefore, rely on that information to create a timely and efficient long-term decision on the distribution of resources.
- Work-Capital Management Insight: The fund flow statement attaches much importance to changes in working capital, hence holding a significant value in ascertaining the operational efficiency of any firm. It helps management detect whether potential cash shortages or surpluses exist, thus enabling them to make necessary adjustments in operations through tracking changes in working capital.
- Main Financial Fluctuations Revealed: This statement will project important financial changes to be visible during a given period either through acquisition of fresh funds or sale of assets. It very clearly portrays to stakeholders how the organization restructures its finances for strategic purposes.
Disadvantages of Fund Flow Statement
- Complexity in Preparation: The preparation of fund flow statements is relatively complex compared to the preparation of cash flow statements, especially for small businesses with limited funds. The statement demands that there be detailed tracking of funds sourced and used. This can be cumbersome, even prone to error if not well controlled, and probably time-consuming.
- Not Very Suitable for Short-Term Analysis: It is more concerned with long-term trends rather than a real-time snapshot of liquidity like the cash flow statement. Therefore, it lacks adequate information for analyzing a company’s liquidity situation, especially in the short term.
- Historical Nature: The fund flow statements are based on past data. They give a picture of historical movements of funds instead of current financial conditions. Thus, it is quite less useful to make day-to-day operational decisions on this basis since they will not represent the current financial standing of the company.
- No Impact on Cash Position: This fund flow statement mainly looks at the change in the working capital and long-term financial activities. Thus, it does not give a good view of the cash position of the company or its ability to meet short-term obligations, a critical feature at the time of the financial crisis.
Conclusion
The primary distinction between a cash flow statement and a fund flow statement is that even though the two statements provide useful information about the financial condition of a company, they serve different purposes. While the cash flow statement discussed above is concerned with liquidity and traces cash flows in the short term, the fund flow statement examines long-term sources and uses of funds, which are usually related to working capital. Each of these is a necessary part of a comprehensive financial study; yet, each tends to support different kinds of strategic needs.
Difference Between Cash Flow and Fund Flow Statement FAQs
What is the difference between cash flow and fund flow statements?
The cash flow statement focuses on the inflow and outflow of cash over a specific period, while the fund flow statement highlights changes in working capital and long-term funding sources.
What are the three sections of a cash flow statement?
A cash flow statement is divided into three sections: Operating Activities, Investing Activities, and Financing Activities.
How does a fund flow statement help in financial planning?
The fund flow statement helps in identifying long-term sources and uses of funds, assisting businesses in making strategic financial decisions regarding investments and capital allocation.
Can a company have a positive cash flow and a negative fund flow?
Yes, a company can have a positive cash flow but a negative fund flow if it generates cash through operational activities but uses more funds for long-term investments or debt repayments.
Why is working capital important in fund flow analysis?
Working capital reflects a company’s short-term financial health. A fund flow statement tracks changes in working capital to assess how well a business is managing its short-term assets and liabilities.
