Despite their similarity in sound, fund flow and cash have different effects on financial strategy. Funds are the available financial resources for a business, whereas cash is the actual currency that is on hand. Knowing the difference between cash flow and fund flow is essential to understanding their respective roles in a company’s financial picture. Now let’s examine the subtle difference between cash flow and fund flow.
What is a Fund Flow?
A business’s working capital, or fund flow, is the total amount of money coming in and going out. The net working capital fluctuations of the company during a specified period are documented in the fund flow statement. The statement helps with long-term financial planning and can be used to assess a company’s financial situation. A review of the fund flow statement will reveal any irregularities in spending or financial activities. Although fund flow is not as detailed as a cash flow statement, it can still be used to measure investor mood.
What is a Cash Flow?
The cash flow statement is an essential document for comprehending how money moves throughout a company. It then keeps track of how much money has come into and gone out of the company’s accounts over time. The flow of cash might be attributed to financing, investing, or operating operations. As a result, the statement represents an analytical reconciliation of the cash balances at the beginning and end of the specified time. For investors, it is one of the top four financial statements. Prior to investing, it indicates to them whether the company may have liquidity issues.
Difference Between Cash Flow And Fund Flow Statement
| Basis For Comparison | Cash Flow Statement | Fund Flow Statement |
| Meaning | The statement of the company’s cash inflows and outflows between two financial periods is called the cash flow statement. | A fund flow statement is a financial tool used to compare two fiscal years and analyze changes in the company’s financial position. |
| Basis of Accounting | Cash Basis of Accounting | Accrual Basis of Accounting |
| Discloses | Inflows and Outflows of Cash | Sources and applications of funds |
| Tool for | Short-term financial analysis | Long-term financial analysis |
| Objective | To describe the change in cash between two points in time. | To explain the factors that led to variations in the assets and liabilities listed on the balance sheet between two fiscal years. |
| Opening Balance | Opening balance is present | No opening balance |
| Difference insides | shows the cash balance at closing. | shows the increase or decrease in the working population |
| Part of the Financial Statement | Yes | No |
Advantages of Cash Flow Statement
- To evaluate a company’s liquidity and profitability, a cash flow statement is helpful.
- By showing the flow of cash into and out of the company, the cash flow statement aids in the evaluation of the balance sheet and the profit and loss statement.
Disadvantages of Cash Flow Statement
- It is impossible to determine a company’s profit and loss by looking at the statement alone because it just shows the cash position.
- A cash flow statement only shows the company’s cash position at the end of the period, making it insufficient to evaluate its liquidity or solvency condition. It’s not a representation of the liquidity situation.
- Understanding expected or future cash flows is not aided by the cash flow statement, which is created using previous costs.
Advantages of Fund Flow Statements
- A fund flow statement helps to comprehend the company’s ability to generate funds, which in turn provides management with important information for future decision-making.
- When making decisions on how to use resources, management can benefit from having a fund flow statement. This will facilitate the appropriate distribution of scarce resources.
- The fund flow statement shows how the available money is used, but it also highlights efficiency and sheds light on the company’s working capital management.
Disadvantages of Fund Flow Statements
- There is limited clarity regarding the company’s present and future costs due to the historical nature of the data provided.
- The fund flow statement cannot be used independently without a balance sheet and a P&L (Profit & Loss) statement because it only gives an indication of changes in the company’s working capital. As a result, financial statements cannot be replaced by a fund flow statement.
Conclusion
In contrast to fund flow, which is less common among investors, cash flow is more often utilized. However, if we examine each one in isolation, we will discover that they are both important. A money flow statement, on the other hand, assists a business in creating a capital budget and taking the appropriate action with regard to the particular elements that have an impact on the “sources & uses of funds” within the organization.
Leave a Comment