No, the fund flow statement and cash flow statement are not the same thing. However the terms are used like they are which can be confusing for those who know there is, in fact, a difference (soon you will join these ranks). So what is a fund flow statement, what is a cash flow statement, and what are the benefits?
Maybe you could use a little refresher on Financial Accounting – this course covers assets, inventory management, prepping financial statements and more.
A fund flow statement is a record or report of the changes made to a company’s working capital. It considers the sources and applications of the company funds for a certain period. This is to say the inward (sources) and outward (applications) flow of operating assets. An operating asset merely means all tangible and intangible values that a company possesses. This includes property, machinery, tools, supplies, inventory, intellectual property and cash. The fund flow statement helps monitor this flow or change so you can see the long-term health of your venture. A fund flow statement is usually only created if there is a change to working capital. If an asset is sold or purchased; a liability paid off or created; or an exchange of a current asset is reason to prepare a fund flow statement. There are guidelines for preparing every kind of financial statement you can imagine. Read the cleverly written Financial Commandments to learn about governing boards and regulation you best be aware of.
A cash flow statement is much more readily available than its often-confused-with counterpart. See, the cash flow statement reports all of the cash that is flowing all the time. This does not include things like fixed assets that fall under the working capital category. Fixed assets are valuable but really usually only to the company using them. They don’t have high cash turnover rates and they aren’t sold for income to the public. They exist as income generating tools, of which, in their absence, you would be rendered non-operational. So these are the basic differences between fund flow and cash flow statements – but there’s more.
A fund flow statement functions from the accrual standpoint of accounting. The accrual method states that when a company invoices for a project done or a product sold – even though they may have not received payment yet – they record it as being received in the books. Contrarily, the cash flow statement method only accounts for items and services that have been paid in cash or in cash equivalent. This is based more off of the recovery method of accounting where accounts payable and receivable are not recorded until the transaction is actually complete.
Other fundamental differences between the fund flow statement and cash flow statements are:
- Fund flow statements generally are more useful when it comes to long term financial planning. Cash flow statements really only show us what cash is on hand, where we started and where we ended during a specific period of time. While this is useful information, it’s not easy to see how investments are shaping up or how operating assets are doing which determines what trend your company is taking (upward or the more unfortunate, downward). Learn how to make a financial statement in this course.
- The fund flow statement generates a vision of how income is flowing from all sources so you can capture the gist of what your net operating asset (NOA) is (the amount of spending money you have after all debts are paid).
- On a fund flow statement you can locate exactly where the profits have gone instead of looking at a few dollar signs on the cash flow statement and thinking you’re rich.
- While the benefits of using a fund flow statement should be rather obvious by now, in case they aren’t, let’s hone in on a couple more advantages. Then you can check out Interpreting Financial Statements so you can make sense of all of this.
- By using a fund flow statement you can assess whether the current working capital is fulfilling the business needs. In other words, do you need more or less stuff to accomplish your goals?
- This handy report is great for potential investors. This gives them the ultimate breakdown of your financial credibility and worthiness. The better you look on paper, the higher chances you have of getting investors on board.
Before we wrap thing up – here’s how to create your very own flow of fund statement.
- Create a Statement of Changes in Working Capital
- Prepare Funds from Operation (take this information from section two of your statement Operating Activities and not from Investing Activities – section one).
- Prepare the fund of flow statement starting off with the Source of Funds (including issue of shares and debentures for cash, long term loans, sale of investments and other fixed assets, funds from operations and decrease in working capital) and the Application of Funds (purchase of fixed assets and investments, redemption of debentures, shares and repayment of a loan, payment of dividend and taxes and an increase in working capital).
This may feel vague, because it is, preparing these statements is greater than the scope of this article. Take a few minutes and check out Preparing Financial Statements to get the detailed scoop on putting this document together.