Preparation of Fund Flow statements and its Analysis

Preparing a fund flow statement involves presenting the sources and uses of funds during a specific period, typically illustrating how funds have been generated and utilized by an organization. The fund flow statement provides insights into the company’s financial activities, capital structure, liquidity position, and overall financial performance. Here’s a step-by-step guide to preparing a fund flow statement and analyzing its components:

Steps to Prepare Fund Flow Statement:

Identify the Starting and Ending Period:
- Determine the beginning and ending dates for the period under consideration, such as a month, quarter, or year.
Classify the Sources and Uses of Funds:
- Sources of Funds: Identify and classify the inflows of funds into the organization from various activities and transactions, such as:
  - Proceeds from Sale of Assets
  - Issuance of Securities (Equity or Debt)
  - Long-term Borrowings
  - Other Capital Inflows
- Uses of Funds: Identify and classify the outflows of funds from the organization for various activities and purposes, such as:
  - Capital Expenditures
  - Debt Repayments
  - Dividend Payments
  - Operating Expenses
  - Other Capital Outflows
Prepare a Schedule of Changes in Working Capital:
- Analyze the changes in working capital components, such as current assets and current liabilities, during the period to determine the impact on funds flow.
Calculate the Net Increase or Decrease in Funds:
- Calculate the net increase or decrease in funds by considering the difference between the total sources and total uses of funds during the period.
  - $Net Increase or Decrease in Funds = Total Sources of Funds - Total Uses of Funds$
Prepare the Fund Flow Statement:
- Present the sources and uses of funds in a structured format, beginning with the opening balance of funds, analyzing the changes during the period, and ending with the closing balance of funds.
  - Fund Flow Statement Format:
    - Opening Balance of Funds
    - Sources of Funds:
      - Proceeds from Sale of Assets
      - Issuance of Securities
      - Long-term Borrowings
      - Other Capital Inflows
    - Total Sources of Funds
    - Uses of Funds:
      - Capital Expenditures
      - Debt Repayments
      - Dividend Payments
      - Operating Expenses
      - Other Capital Outflows
    - Total Uses of Funds
    - Net Increase or Decrease in Funds
    - Closing Balance of Funds

Fund Flow Statement Analysis:

Liquidity Analysis: Assess the liquidity position by analyzing the sources and uses of funds, ensuring sufficient funds are available to support operations and financial obligations.
Capital Structure Analysis: Evaluate the capital structure by examining the sources of funds, including equity, debt, and other capital inflows, and assessing the organization’s financing strategies and capital allocation decisions.
Cash Flow Analysis: Analyze the fund flow statement in conjunction with the cash flow statement to understand the relationship between funds flow and cash flow, identifying discrepancies or significant differences requiring further investigation.
Financial Performance Analysis: Assess the overall financial performance by analyzing the net increase or decrease in funds, evaluating the impact of financial activities and operational decisions on funds flow, and identifying trends, patterns, and relationships affecting the organization’s financial condition and performance.

preparing a fund flow statement involves analyzing and presenting the sources and uses of funds during a specific period, providing insights into the organization’s financial activities, capital structure, liquidity position, and overall financial performance. By analyzing the fund flow statement, stakeholders can assess the company’s financial health, liquidity management, capital structure, and strategic alignment, supporting informed decision-making, analysis, and evaluation in a dynamic and competitive business environment.