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Whether you wish to attract investors or create a realistic financial forecast for the year to come, a fund flow chart can help. Conducting a fund flow analysis shows how your business’s funds are generated and where they have been used for a clearer financial picture. So, what is fund flow statement analysis and how does it work? Here’s how to get started.
What is a fund flow statement?
You may already be familiar with the three primary financial statements:
Profit and loss statement
Cash flow statement
The fund flow statement complements the three statements above. While the other financial statements show a company’s income and expenses, they don’t explain the reason for fluctuations during the accounting period. The purpose of a fund flow statement is to explain this movement of funds over the course of the year.
Businesses have flexibility with how they can create this statement, whether it’s in a simple spreadsheet or a visual flow of funds diagram. No matter the format, it reports changes in net working capital involving a business’s current assets and current liabilities.
Here’s a quick example of how the fund flow statement might show information you wouldn’t see on other financial statements. Imagine a business’s inventory increased in value from $500,000 to $600,000 during the accounting period. Its working capital increased by $100,000, which would be reflected on the fund flow statement. Because this doesn’t involve cash, the increase wouldn’t show up on the cash flow statement.
What’s the difference between cash flow and fund flow statements?
Both the cash flow statement and fund flow statement offer similar information, but there are a few key differences to be aware of.
Fund flow statements:
Must always use the accrual accounting method
Are used for long-term financial planning
Look at longer term changes in funds over time
Show funds generated from equity and changes in working capital
While a cash flow statement analysis helps assess a business’s current cash position, the fund flow statement analysis is better for future financial planning.
What is fund flow statement analysis?
A fund flow statement analysis pulls together data collected from the balance sheet, focusing on funds inflows and outflows. It’s used by financial analysts, investors, and stakeholders to see how well a business is using its funds.
A growth in assets on the balance sheet shows that the company has spent funds, for example. This implies that there might be a corresponding inflow of funds due to these newly acquired assets. By contrast, a decline in assets shows that the company has used its assets for fund inflow.
A growth in liabilities on the balance sheet shows that the business has an inflow of funds in need of payment. If the liabilities have declined, it shows all obligations are met. The financial analyst might conclude that it’s unlikely that there will be a further outflow of funds to meet debt obligations anytime soon.
How to conduct a fund flow statement analysis
As you can see, the first step to conducting a fund flow statement analysis is to use the existing financial statements for source material. The balance of assets and liabilities is used to create a fund flow statement. This is then combined with the balance sheet to draw conclusions and make predictions about a company’s financial position.
There are three components of a fund flow analysis:
Changes in working capital: This measures the difference between current assets and current liabilities.
Funds from operations: This adds non-cash expenses like taxes, depreciation, and accrued interest to your profit and loss statement.
Fund flow statement: This is divided into two sections, including sources of funds (where do they come from) and application of funds (what were they used for).
Ultimately, performing a fund flow analysis gives you a better view of your current and future financial position. You’ll be able to see where your money’s coming from and where it’s going, to see if there’s any opportunity to make your operations more efficient.
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