What is fund flow analysis?

Answer 1

hat is a Fund?

Fund

Meaning

Money that is set aside for a particular purpose.

To provide money for paying off the interest or principal of (a debt).

To finance, using long-term debt or Capital.

Synonyms

Finance

Support

Back

Furnish

Fund = Capital

We use the phrase "We need additional funds" to mean we need additional capital whether be it for acquiring assets, clearing liabilities or for meeting expenses.

This indicates that Fund means Capital.

All capital of the organisation whether owned or loaned is capable of being called Fund.

Fund is Capital freely available for use

A Fund by its nature would be capital kept aside with a purpose. The fund should be capable of being used for the specified purpose at any time.

Fund, in the topic Funds Flow Analysis, is a general purpose fund. It represents capital resource that would be available to the organisation for general purposes. It would be capable of being used in any manner the organisation prefers without any restriction/hindrance.

Fund is Capital supported by Current Assets

Every rupee of a liability/capital is supported by a rupee of an asset. Every rupee of an asset is financed by a rupee of a liability.

Consider a new business that has been started with a capital of Rs. 2,00,000 brought in cash. The organisation's Balance Sheet immediately after this first transaction would be:

Balance Sheet of M/s ___ as on 31st December __

Liabilities Amount Assets Amount

Capital 2,00,000 Cash 2,00,000

2,00,000 2,00,000

Liabilities supported by Assets : Capital is supported by cash

Assets financed by Liabilities : Cash is financed by Capital

The next day, Furniture worth Rs. 1,00,000 and Stock Worth Rs. 50,000 have been bought for cash. The Balance Sheet after these transaction would be :

Balance Sheet of M/s ___ as on 31st December __

Liabilities Amount Assets Amount

Capital 2,00,000 Cash

Furniture

Stock 50,000

1,00,000

50,000

2,00,000 2,00,000

Liabilities supported by Assets : Capital is supported by Cash, Furniture and Stock

Assets financed by Liabilities : Cash, Furniture and Stock are financed by Capital

Capital/Cash is employed in purchasing Assets

Since Cash used in purchasing Furniture was financed by Capital, we can say that Furniture is financed by Capital. Whereby, we say that capital is employed in purchasing furniture.

On converting an asset into a new one, the liability that was being supported by the replaced asset would now be supported by the new asset. Therefore, on employing capital, the assets supporting capital change.

Capital that can be employed

To be able to employ capital for any purpose, the asset that is supporting it should be easily convertible.

Fund is Capital supported by easily convertible Assets

Fund is capital freely available for being used in any which way the organisation intends i.e. for long term or short term needs. To enable such usage, funds (capital that we call funds) should be supported not just by assets which are convertible but by assets that are easily convertible.

Current Assets are easily convertible

Current

Meaning

Belonging to the present time.

Not overdue; occurring this period.

Synonyms

Present

Existing

Recent

In Progress

Current Assets are assets that are capable of being liquidated in a time span of a year or less. They represent easily convertible assets.

Fund is capital supported by easily convertible assets

+ Current Assets are easily convertible assets.

? Fund is capital supported by Current Assets

Funds exclude Current Liabilities

Current Liabilities

Current liabilities are liabilities that are to be repaid/cleared within the near future (a short period of time). Current liabilities are considered to be supported by current assets as they are similar in nature i.e. both of them have a short life span (a year or less). Current liabilities have a charge on current assets.

Fund is capital that is freely available for use for any purpose the organisation intends without any hindrance/restriction.

All the capital that is supported by current assets cannot be said to be freely available for use without any hindrance. We do not consider Current liabilities to be representing capital that is freely available for use, since they are to be repaid within a short time span

Therefore, capital supported by current assets excluding current liabilities would only be considered as fund.

Fund = Current Assets - Current Liabilities

Fund is freely available capital

+ Fund is capital supported by Current Assets

+ Fund is capital supported by current assets excluding current liabilities

[Current assets in excess of those supporting current liabilities support funds.]

? Funds = Current Assets - Current Liabilities

Fund = Working Capital

Excess of Current Assets over Current Liabilities is Working Capital

? Working Capital = Current Assets - Current Liabilities.

? Fund = Working Capital

What is Funds Flow?

Flow

Meaning

To move or run smoothly with unbroken continuity like in the case of a fluid.

Something that resembles a flowing stream in moving continuously

Synonyms

Stream

Gush

Course

Funds Flow

Fund being working capital, Funds flow indicates the flow of working capital between two points of time. It involves information relating to the various transformations undergone by working capital (i.e. the changes that have taken place in working capital) during the period involved between the two points of time.

Every change in working capital is associated with (or is on account of) a flow either an inflow or an outflow. Thus, funds flow involves information relating to the inflows and outflows that resulted in a change in working capital between the two points of time.

When do we say that there is a flow of fund?

Fund (Working Capital) in an Organisation is like water in a reservoir. The Fund is analogous to water and the reservoir to the organisation.

There is a change whenever there is a flow

There would be a change in fund (working capital) whenever there is a flow (in/out) of fund.

An inflow would result in an increase and

An outflow would result in a decrease.

There is a flow whenever there is a change

A change in fund (working capital) in the organisation is an indication of flow of fund.

An increase would indicate an inflow and

A decrease would indicate an outflow.

Hidden/Masked flows

When there is an inflow followed by an outflow of the same magnitude, there may not be a change in fund (working capital). An inflow would result in an increase in fund which would be set off by an outflow resulting in a decrease. Since the magnitude is the same, after the two transactions, the fund seems to be unchanged.

In such situations, to notice the change, we will have to break down the transactions into two instead of viewing them in total.

Answer 2

Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vise- versa. First of all, we make fund flow statement and then study its cause and effect deeply and try to find many important facts and information which can be used in business. It can also solve following problems.

Q: - 1. Why are net current assets decreasing after getting high volume of net profit?

Ans. Fund flow statement is made by take two period balance sheets and if we study it then we can find that it may possible that we are using net profit for purchasing fixed assets. Statement of changing in working capital can also show net decrease in working capital.

Q:-2.Why did company not issued high dividend, even company had earned high profit in last year?

Ans. You know that dividend is given after seeing the level of fund from operation not net profit. If company has made fund flow statement, then fund from operations will be the source. Financial analyst should check this amount and suggest board of directors what amount will be suitable according to the revenue performance of company. So, it is not necessary that high profit level will give high dividend to shareholders.

Q: - 3. How did company use the net profit?

Ans. Fund flow statement provides clear picture of sources and utilization of fund and if we take some adjustments of non operating items, then we can know the amount of fund from operation and it is compared with fund used. So, it may possible that we had used it for purchasing fixed assets or repayment of loan.

Q: - 4. What are the main sources of redemption of loan?

Ans. Loan is the main fixed liability of business and if it has increased from previous period, then if we study sources of fund from fund flow statement, then we can estimate that whether sources are strong to repay all the amount of loan or not. Suppose, if we are taking another loan to repay the amount of payable loan then it is not good source but if we have received large money from operation as source for repayment then it can be said that it is good source of fund.