Fund Flow vs Cash Flow
When a business prepares their year-end accounts they prepare three statements that include the income statement, Balance sheet, and the cash flow statement. Additionally, companies also prepare the retained earnings statement and funds flow statement to obtain better insight of business activities. The cash flow statement and funds flow statement appear to be the same thing, merely, the way they are worded. However, the two are quite different to each other, and the following article provides a clear overview of their differences while providing a good understanding of what each means.
Cash Flow
A firm’s cash flow statement will clearly show the movement of cash around the business, how the cash has been coming in and where it has been spent. All these cash receipts and payments are then summed up together to derive at a figure known as the net cash flow, which is essentially the cash that is left over once all cash movements have been accounted.
A cash flow statement is split up into a number of sections which include: operating activities, investing activities, and financing activities. Operating activities are those activities that help a company generate revenue, investing activities refer to any cash movements in the firm’s investments and any longer term investments and financing activities refer to any activities related to the firm’s shareholders and creditors. If the cash flow statement is done up accurately, the totals of these 3 segments should add up to firm’s overall total cash flow.
Fund Flow
The funds flow statement shows the movement of working capital with the company during the period of reporting. Working capital refers to the capital that is used by a business for its day to day operations. The formula used to calculate working capital is [Current Assets (such as stock, cash, bank balance) – Current Liabilities (creditors, bank overdraft)]. The changes in this formula will be shown clearly in the funds flow statement. For example, if the company’s stock increased from $10,000 to $20,000 and the bank balance reduced from $50,000 to $45,000 the balance $5000 will be shown in the funds flow statement.
Fund Flow vs Cash Flow
The main similarity between these two statements is that they are both produced in order to obtain a better understanding of the business’s performance during its period of operation. The two statements are prepared specifically to obtain an overview of the company’s liquidity (ability to pay its debts). The two statements are quite different to each other in terms of what they record. The cash flow statement shows the movement of cash within a business as a result of its day to day business operations, whereas the funds flow statement shows the changes in the business’s working capital. However, of the two, cash flow statements are more widely used as it is a known fact that cash movement is a better prediction of liquidity, as opposed to working capital.
Summary:
Fund Flow and Cash Flow
• A firm’s cash flow statement will clearly show the movement of cash around the business, how the cash has been coming in and where it has been spent.
• The funds flow statement, on the other hand, shows the movement of working capital with the company during the period of reporting.
• The two statements are both prepared specifically to obtain an overview of the company’s liquidity (ability to pay its debts).