Funds Flow Analysis is a financial analysis tool used to examine the movement of funds (working capital) within an organization between two balance sheet dates.
✅ Explanation:
Funds Flow Analysis tracks the sources and applications of funds over a specific period, helping to understand how a business generates and uses its working capital.
It focuses on the changes in the financial position, especially related to non-current assets and liabilities, rather than just cash. Unlike a cash flow statement, it deals with all components of working capital (current assets and current liabilities).
🔍 Key Components:
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Fund: Generally refers to working capital (i.e., current assets – current liabilities).
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Sources of Funds: Activities that increase working capital, e.g.: Payment of creditor by issue of debenture,
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Issue of shares or debentures
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Long-term loans raised
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Sale of fixed assets
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Decrease in working capital
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Application (Uses) of Funds: Activities that decrease working capital, e.g.: Purchase of furniture for cash
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Purchase of fixed assets
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Repayment of loans
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Payment of dividends
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Increase in working capital
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Funds Flow Statement: A statement showing the inflows and outflows of funds between two balance sheet dates.
✅ Importance of Funds Flow Analysis:
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Assesses financial health and liquidity.
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Reveals how profits are used (reinvested, distributed, etc.).
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Aids in long-term financial planning.
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Highlights non-operating sources and uses of funds.
❌ Why it’s different from Cash Flow Analysis:
| Aspect | Funds Flow Analysis | Cash Flow Analysis |
|---|---|---|
| Basis | Working capital | Cash and cash equivalents |
| Time Horizon | Medium to long-term | Short-term |
| Focus | All sources/uses of funds | Only actual cash movements |
Funds Flow Analysis is the study of changes in a company’s financial position (particularly working capital) over time, identifying where funds come from and how they are used.