FUNDS FLOW ANALYSIS
• Flow of funds in and out of the business entity is a
regular feature. The flow takes place through
cash, credit or exchange transactions
• Thus, raising and deployment of fund is an almost
continuous process, which requires close
monitoring to achieve the organisaatinal goal of
profit maximisation.
• Any increase in assets means use of funds and
any decrease in assets as source of funds.
Likewise, any increase in liabilities results into
sources and decrease in liability as uses of funds.
1
•
Increase in liability or decrease in
asset is a source of funds.
Decrease in liability or increase in
asset is use of funds
2
However, there are few transactions, which may
result in the changes in assets or liabilities but there
may not be any flow of funds.For instance:
i)
Issue of bonus shares
ii)
Revaluation of Assets
iii)
Loss of goods due to fire
While comparing the figures of balance sheet we
can obtain sources and uses of funds during a
given period. For instance the value of net fixed
asset shown in a balance sheet for the year 1998
and 1999 were Rs.45 lakhs and Rs. 55 lakhs and the
purchases of fixed assets during the year 1999 were
of RS. 15 lakhs.Then, the changes of Rs. 10 lakhs as
per balance sheet will show as use of funds
whereas actual use has been of Rs. 15 lakhs.
3
A decrease in NWC is considered source of
funds
An increase in NWC thus considered use of
funds
4
SCHEMATIC PRESENTATION OF FUNDS FLOW
Opening
Balance of
NWC
Changes in
Working
Capital
SOURCES OF WORKING
CAPITAL
*
*
*
*
*
Business operations
Sale of Fixed Assets
Sale of Long Term
Investments
Issue of Long Term Debt
Issue of Equity
Closing
Balance
of NWC
USES OF WORKING
CAPITAL
* Acquisition of Fixed Assets
* Long Term Investments
* Repayment of Long Term
Debts
* Payment of Dividend
5
Sources of funds
1.
2.
3.
4.
Decrease in non-current assets
Increase in non-current liabilities
Increase in owner’s equity
Business Operations
Uses of funds
1.
2.
3.
Increase in non-current assets
Decrease in non-capital liabilities
Decrease in Owner’s equity
6
From the funds flow statement one can know the following:
1.
2.
3.
4.
5.
6.
Funds provided by business operations
Changes in NWC over the period
Amount of NWC deployed in the business
Which long term sources of funds can be further
trapped to finance current assets ?
Is the ratio between sources of short-term funds and
long - term funds reasonable ?
What corrective action should be initiated by the
management, if problems are spotted in both in
investment and financing ?
7
FORMAT FOR FUNDS FLOW STATEMENT
FUNDS FROM PETTAIONS
Amount
Net Profit after Tax
ADD:
Depreciation
Any other amortisation expenses
Loss on sale of assets
LESS:
Gain on sale of asset
FUNDS FROM OPERATIONS
_____________
8
FORMAT FOR FUNDS FLOW STATEMENT
SOURCES OF FUNDS
1.
2.
3.
4.
Funds from operations
Increase in Capital
Increase in Term Liability
Decrease in
a.Fixed Asset
b.Other non-current asset
TOTAL SOURCES(Total of 1 to 4)
Contd…
Amount
__________
9
FORMAT FOR FUNDS FLOW STATEMENT
USES OF FUNDS:
1.
2.
2.
4.
Dividend payment
Decrease in Term Liability
Increase in
a. Fixed Asset
b. Other non-current asset
Net Working Capital
TOTAL USES ( Total of 1 to 4 )
Contd…
Amount
________
10
CASH FLOW STATEMENT
The Cash flow statement enables one to know the closing balance of
cash and changes in other assets. Which have led to the change
in the cash balances. It also enables one to know
1.
Changes which have taken place in cash over time.
2.
The amount of cash provided by the operations of the business
3.
How much cash is used and for which purpose
4.
How much more cash is required to be obtained etc ?
11
SCHEMATIC PRESTNTATION OF CASH FLOW
Opening
Balance of Cash
*
*
*
*
*
*
Change in
Cash
SOURCES OF CASH
Net decrease in current assets other *
than cash
A gross decrease in fixed assets
*
A net increase in current liability
*
A net increase in non-current liability*
Proceeds from the sale of equity/
*
preference shares
Cash from operations
*
Closing Balance
Of Cash
USES OF CASH
Net increase in current assets other
than cash
A gross increase in fixed assets
A net decrease in current liability
A net decrease in non-current liability
Redemption of preference shares
or loans
Cash loss in operations
12
FORMAT FOR CASH FLOW STATEMENT
CASH FROM OPERATIONS:
Amount
Net Income
ADD: Depreciation
Amortisation expenses
Loss on sale of non-current assets
(except cash)
Increase in each current liability
LESS:
Gain on sale of non-current assts
Increase in each current assets
(except cash)
Decrease in each current liability
____________
cash from operations ( + / -)
13
FORMAT FOR CASH FLOW STATEMENT
STATEMENT OF SOURCES AND USES OF CASH
Contd…
SOURCES
AMOUNT
Cash from operations
Sale of long-term investments
Sale of other fixed assets
Share Capital
USES
TOTAL SOURCES
(A)
Acquisition of fixed assets
Payment of dividend
Purchase of marketable securities
Change in cash ( +/_)
TOTAL USES
Change in Cash (+ / -)
(B)
(A- B)
_______
AMOUNT
_______
_______
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