Financial statements are necessary for companies to keep track of their company’s economic health. Such documents also help business owners make strategies for the future with regard to mergers, acquisitions, investments, and so on. The role of a financial analyst is indisputable in such matters.
Two such essential components of financial analytics are cash flow statements and fund flow statements. While both might sound the same, in reality, there is a difference between cash flow and fund flow, as these two statements have different features and provide different kinds of advantages to businesses.
In this article, we will dive into what is cash flow statement and what is fund flow statement, their advantages, and the key difference between cash flow and fund flow to offer a comprehensive view.
Keep reading to learn more!
What is Cash Flow?
The cash flow of a company refers to its inflow and outflow of cash and its cash equivalent. A cash flow statement is a recording of this money flow to and from the company.
A cash flow statement is one of the most important pieces of financial statements recorded by financial analysts in order to gauge a company’s current liquidity and help make decisions regarding investments. It also helps keep track of changing opening and closing cash balances.
The difference between cash flow and fund flow is that cash flow statements are created for specific time periods, like quarterly, semi-annually, or annually. The primary components of cash flow statements are:
- Cash flow from investing activities
- Cash flow from operating activities
- Cash flow from financing activities
Advantages of Cash Flow Statement
The primary advantages of cash flow statement are:
- It helps in assessing the profitability of a business.
- It helps in assessing company balance sheets and profit and loss statements.
Disadvantages of Cash Flow Statement
The disadvantages of cash flow statement are as follows:
- It provides an incomplete profit view since it excludes non-cash accounting items, resulting in a limited picture of profitability.
- It cannot be used as a standalone tool and needs to be analyzed alongside other statements, such as the balance sheet and income statement.
- It represents past cash flows and may not correctly reflect the current or future financial status.
What is Fund Flow?
Fund flow signifies the working capital of an enterprise. Thus, a fund flow statement tracks and records the net movement of funds in and out of the enterprise.
Fund flow statements are ideal for long-term financial planning. Furthermore, irregularities in company funds can be identified through fund flow statements. In addition to helping monitor the working capital of a business, fund flow statements also aid in capital budgeting.
The main components of working capital that form a part of fund flow statements are:
- Inventory
- Receivables
- Cash
- Payables
Advantages of Fund Flow Statement
Let’s look at the following advantages of fund flow statement:
- It helps company owners and managers understand how efficiently funds are being allocated and utilised within the company. This information can help further optimise the process.
- Fund flow statements are useful in deducing the fund-generating capacity of any business. This data can be handy while making future financial decisions.
- Fund flow statements also help improve resource usage and better allocation of limited resources.
Disadvantages of Fund Flow Statement
Below are the disadvantages of fund flow statement:
- Fund flow statements deal primarily with historical data and do not provide real-time insights into a company's current financial situation or future prospects.
- Fund flow statements solely consider cash transactions and exclude non-cash elements such as depreciation or changes in non-cash working capital. This may give an imperfect picture of a company's financial condition.
- Fund flow statements can be complex, requiring an in-depth understanding of accounting principles to interpret them correctly. Interpreting the causes of fluctuations in fund balances can be difficult.
Key Difference Between Cash Flow and Fund Flow Statement
While cash flow and fund flow statements are crucial parts of a company’s finances, they differ. The difference between cash flow and fund flow are discussed below:
| Cash Flow Statement | Fund Flow Statement |
| Denotes the inflow and outflow of cash and cash equivalent over a given period of time. | Denotes the changing working capital of a company over a given period of time. |
| Helps in deducing the net cash flow of a business. | Helps in deducing the financial position of a business. |
| Is used for cash budgeting. | Is used for capital budgeting. |
| Part of a company’s financial statement. | Not part of a company’s financial statement. |
| Documents the inflow and outflow of cash and changes in the opening and closing balances of cash. | Documents the source and application of a company’s funds. |
| All kinds of disclosures regarding the inflow and outflow of cash are mandatory. | Helps disclose the source and application of any given fund. |
| Aids in short-term financial decision-making or planning. | Aids in making long-term financial plans and decisions. |
Conclusion
After examining the difference between cash flow and fund flow, we can say that both statements are essential for companies to understand their current financial position and strategize for the long term.
Both of these statements come with their advantages and features; hence, neither can be ignored while making financial decisions. Therefore, companies are always on the lookout for trained financial analysts who can understand the difference between cash flow and fund flow statements, prepare and track such statements, and help make the most effective economic decisions.
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