Here is a detailed explanation covering the difference between Fund Flow Statement and Cash Flow Statement, and a comprehensive breakdown of Cash Flow Statement, Cash Flow Analysis, Fund Flow Analysis, along with their importance, characteristics, limitations, types, and usage — written in paragraph format and easy to understand.
---
Difference Between Fund Flow Statement and Cash Flow Statement
The Fund Flow Statement and the Cash Flow Statement are both financial tools used to analyze the movement of resources within a business. However, they differ in their purpose, focus, and scope.
Fund Flow Statement explains the changes in financial position between two balance sheet dates, showing the movement of working capital. It highlights where funds came from and how they were used.
Cash Flow Statement, on the other hand, records actual inflows and outflows of cash and cash equivalents during a specific accounting period, helping to understand liquidity and the company's ability to manage cash.
Fund Flow vs Cash Flow Statement
Basis
Fund Flow Statement
Cash Flow Statement
Focus
Working capital
Cash and cash equivalents
Period
Medium to long-term
Short-term (usually a year)
Objective
Analyzing movement of funds
Monitoring cash liquidity
Source of Data
Comparative balance sheet and profit/loss
Cash book and other cash-related entries
Accounting Basis
Accrual basis
Cash basis
Usage
Long-term financial planning
Day-to-day financial operations
Cash Flow Statement
A Cash Flow Statement is a financial report that shows how cash is generated and spent by an organization during a specific period. It categorizes cash movements into three main activities:
1. Operating Activities – Cash flow from core business operations (e.g., cash received from customers, payments to suppliers).
2. Investing Activities – Cash used in or generated from investment activities (e.g., buying/selling equipment).
3. Financing Activities – Cash flow from borrowing or repaying funds (e.g., issuing shares, repaying loans).
---
Cash Flow Analysis
Cash Flow Analysis involves reviewing the components of the cash flow statement to understand liquidity, solvency, and financial flexibility. It helps in evaluating:
The company’s ability to generate cash.
How well it manages its financial obligations.
Whether the business is over-reliant on external financing.
Positive cash flow indicates a healthy operation, while negative cash flow signals liquidity problems.
---
Fund Flow Analysis
Fund Flow Analysis tracks the movement of financial resources, particularly focusing on working capital changes over a period. It answers questions like:
What sources generated funds?
How were those funds used (investments, repayment, dividends)?
Has there been a net increase or decrease in working capital?
Fund flow is essential for understanding long-term financing and investment decisions.
---
Importance of Cash Flow Statement
1. Assesses Liquidity – Helps in understanding the company's ability to pay obligations.
2. Financial Planning Tool – Assists in budget preparation and forecasting.
3. Performance Evaluation – Highlights the financial strength and sustainability of the business.
4. Creditworthiness – Used by banks and creditors to determine risk in lending.
5. Investment Decisions – Investors evaluate cash-generating ability before investing.
---
Characteristics of Cash Flow Statement
Based on actual cash transactions.
Categorized into three standard activities (Operating, Investing, Financing).
Objective is to determine net change in cash during the period.
Does not consider non-cash transactions like depreciation.
It complements the income statement and balance sheet.
---
Limitations of Cash Flow Statement
Ignores non-cash transactions that might be financially significant.
May not reflect the true profitability of a business.
Can be manipulated by delaying or advancing cash payments.
Single-period focus may miss broader financial trends.
Does not provide a complete picture of working capital changes like fund flow.
---
Types of Cash Flows (Activities)
1. Operating Activities – Core business operations (e.g., sales revenue, payments to employees).
3. Financing Activities – Raising and repaying capital (e.g., issuing shares, loans, dividends).
---
Where It Is Used
Corporate Management – For liquidity monitoring and planning.
Investors and Shareholders – To assess the company’s financial viability.
Banks and Financial Institutions – For credit evaluation and loan sanctioning.
Auditors and Analysts – As part of financial due diligence and reporting.
---
Conclusion
Both cash flow and fund flow statements are essential tools in financial analysis. While cash flow focuses on cash liquidity, fund flow is concerned with working capital movements. A combination of both analyses gives a more comprehensive view of an organization's financial health. Understanding these tools is crucial for strategic planning, operational efficiency, and long-term growth.
