Fund Flow Statements & How to Prepare a Fund Flow Statement

What is a Fund Flow Statement?
Fund Flow Statement is a financial document that depicts and explains the changes in working capital and financial position of any company during a period as compared with another period.

Why is it Prepared?
Fund Flow Statements are prepared to study and explain the changes in working capital and finances in any period. It explains the reasons for an increase or decrease in the working capital and the finances of the company by revealing changes between two periods and different account heads for a better understanding and management of funds.

How to Prepare Fund Flow Statement?

Fund flow statements are prepared by deriving the amounts of increase or decrease in figures of balance sheets comparing two accounting periods and putting those figures in a statement.

A fund flow statement contains two parts: Sources of Funds and Application of Funds. 

You can prepare it in a single-column statement or in a double-column one.

In a single-column format, first mention all sources of funds and then the applications.

In a double-column format, the left side will show sources of funds, and the applications of funds are shown on the right side. Both totals will match as you will be describing the whole utilisation of resources.

Sources of Funds

Under this head, you will be showing the following figures.

• Shares and debentures issued for cash (including bank cheques, drafts, money transfers, etc.) 
• Amount received through long-term loans. Short-term loans are not taken as they are part of working capital.
• Amount received through sale of fixed assets and investments, etc.
• Gross Profit or funds generated from business operations during the year. This amount is calculated differently through the indirect method by taking the net loss during the year and back calculating the gross funds in a format described below separately in the worksheet
• Decrease, if any, in the working capital. This figure is also calculated by deriving the changes between working capital of two years as per explanation given below separately in a worksheet.

Application of Funds 
Coming to application of funds, the following figures generally appear in a funds flow statement.

• Purchase of Fixed Assets and Investments made during the year on actual payment basis.
• Payments made against redemption of debentures, shares and loan repayments. 
• Tax and dividend payments made during the year. (No provisions for dividend or tax should have been made in current liabilities in this case)
• Increase in working capital, if any. (If there is a decrease in working capital, it is taken as Source of Fund and an increase in working capital is taken as Application of Fund).

So, the format for Fund Flow Statement will be something like this:

Fund Flow Statement of XYZ Company

Sources of Funds	Amount	Application of Funds	Amount
Issue of shares/debentures		Purchase of Fixed assets and Investments
Long term loan receipts during the year		Redemption of Debentures, Shares
Sale of fixed assets/investments		Repayment of Loans
Fund generated from business operations @	as per    worksheet	Tax and Dividend payments
Decrease in working capital  (* as per below  worksheet)		Increase in working capital   (* as per below worksheet)
TOTAL		TOTAL

Regarding the Annexures of the above statement, two worksheets are to be prepared for Funds generated from Business Operations and for the Increase or Decrease in Working Capital. They are prepared as per the worksheets given below. All other figures are taken directly from the Balance Sheet in the above columns.

Worksheet for funds generated from business operations (for above marked@)

You will proceed from Net Profit of the year and back calculate as follows:

Net Profit/ Income                                                 Add (Items shown as expense) Depreciation Loss on sale of Fixed assets Loss on sale/ encashment of investments Deferred Revenue Expenditure Provision for Tax Provision for Dividend Other losses written off TOTAL Less: (Items shown as Income) Profit on sale of assets Profit on Investments Reserves & Provisions written back, if any Other fictitious income shown, if any  Actual Fund generated from operations

50000 10000   2000   1000   2500   1500   3000     500 20500 70500   5000   3000   5000     500 13500 57000

Worksheet for Increase/ Decrease in Working Capital (marked * in fund flow)

Particulars	Previous Year (2012-13)	Current Year (2013-14)	Increase / Decrease
A. Current Assets
Inventories	1200	1500	(+) 300
Sundry Debtors	500	650	(+) 150
Cash & Bank Balances	50	75	(+)   25
Loans & Advances	300	405	(+) 105
Other Current Assets	30	20	(-)   10
TOTAL (A)	2080	2650	(+) 570
B. Current Liabilities
Liabilities (for expenses, creditors & customer advances)	1050	1200	(+) 150
Provision for Tax	350	450	(+) 100
Provision for Dividend	300	360	(+)   60
Others	100	90	(-)    10
TOTAL (B)	1800	2100	(+) 300
Net Working Capital (A – B)	280	550	(+) 270

Note:

If net working capital increases, it is treated as an application of funds because funds are used to increase inventories. On the other hand, when working capital decreases, it is a source of funds because you are saving money by spending less.