Funds flow Statement/Analysis: Advantages,

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Meaning and Definition of Funds flow Analysis/Statement

Funds Flow Statement is a statement which depicts the flow of working capital/funds during a specified period of time. A range of variations in working capital which has taken place during that period is revealed through the statement.

‘Funds Flow Statement’ may be defined as a merged statement of the complete range of ‘Cross Transactions’ during the period covered in the preparation/analysis of the flow. Cross Transactions are responsible for the changes in the ‘Working Capital’. Available funds may go up or down as a results of such transactions.

According to Foulke__” A statement of source and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates”.

According to Anthony__” The funds flow statement describes the sources from which additional funds were derived and the use to which these source were put”.

Advantages of Funds Flow Statement

1. Helps in the Analysis of Financial Operations: The net effect of different business transactions on the ‘operational’ as well as ‘Financial’ status of an organization are disclosed through the ‘financial statements’ prepared for an accounting period. The ‘balance sheet’ reveals the position regarding various resources of funds of a business enterprises and the applications thereof as on a specific date.

2. Helps in the formation of a reasonable dividend policy: There may be a situation,where a company may have enough available profits for dividend distribution,still it is not advisable to distribute dividend due to liquidity constraints. Analysis of funds flow statement facilitates formulation of a reasonable dividend policy in such situations.

3. Act as a future guide: An analysis of funds flow statement may act as a forecasting tool and as such may guide the management of a company for the formulation of future strategies. The prior knowledge of the future fund position at various points of time enable the management to tackle the situation arising out of funds constraints in the future.

4. Helps in improving the use of working capital: A funds flow statement reveals the efficiency of the management in utilising the available working capital. It also advices the steps to be taken for improving the working capital management of the company.

Disadvantages of Funds Flow Statement

  1. Fails to disclose cash position
  2. Lack of originality
  3. Historic in nature
  4. Used alongwith financial statements