Funds Flow Statement: Meaning, Schedule & Preparation

A Balance Sheet presents the financial position of a firm at a single point in time, while a Profit & Loss Account reveals net earnings over a period. However, neither reveals where new funds came from or how they were utilized across the business. The Funds Flow Statement fills this critical analytical gap.

1. What is a Funds Flow Statement?

A Funds Flow Statement is a managerial report that explains the changes in the financial position of a company between two balance sheet dates, specifically highlighting:

• The Sources from which new funds were obtained.
• The Applications (uses) to which those funds were deployed.
• The net resulting increase or decrease in Working Capital.

What Does “Fund” Mean?

In Funds Flow Analysis, the term Fund specifically means Net Working Capital:

Fund = Net Working Capital = Current Assets - Current Liabilities

2. Fundamental Rules of Fund Flow

A transaction results in a Flow of Funds only when it involves one Current Account and one Non-Current (Permanent) Account:

Examples:

• Issued Shares for Cash: Cash (Current) + Share Capital (Non-Current) → Flow of Funds (Source).
• Purchased Machinery for Cash: Machinery (Non-Current) + Cash (Current) → Flow of Funds (Application).
• Collected Cash from Debtors: Cash (Current) + Debtors (Current) → No Flow of Funds.
• Issued Debentures to buy Building: Debentures (Non-Current) + Building (Non-Current) → No Flow of Funds.

3. The 3 Steps to Prepare a Funds Flow Statement

Preparing a complete Funds Flow Statement involves three sequential steps:

Step 1: Schedule of Changes in Working Capital
   ↓
Step 2: Calculation of Funds from Operations (FFO)
   ↓
Step 3: Statement of Sources and Applications of Funds

4. Step 1: Schedule of Changes in Working Capital

This schedule compares the Current Assets and Current Liabilities of two consecutive years:

• Increase in Current Asset → Increase in Working Capital (+)
• Decrease in Current Asset → Decrease in Working Capital (-)
• Increase in Current Liability → Decrease in Working Capital (-)
• Decrease in Current Liability → Increase in Working Capital (+)

5. Step 2: Calculation of Funds from Operations (FFO)

Net profit reported in the Profit & Loss Statement contains non-cash expenses (like depreciation) and non-operating incomes (like gain on sale of land). These must be adjusted to find the true operating funds generated:

Adjusted Profit & Loss Format:

Closing Balance of Profit & Loss Account         ₹ xxxx
Add: Non-Cash & Non-Operating Charges Debited:
     - Depreciation on Fixed Assets              ₹ xxxx
     - Loss on Sale of Fixed Assets / Investments ₹ xxxx
     - Goodwill / Preliminary Expenses Written off ₹ xxxx
     - Proposed Dividend / Transfer to Reserves   ₹ xxxx
                                                --------
Sub-Total                                       ₹ xxxx
Less: Non-Operating Incomes Credited:
     - Profit on Sale of Fixed Assets            (₹ xxxx)
     - Dividend / Interest Received on Inv.      (₹ xxxx)
Less: Opening Balance of Profit & Loss Account  (₹ xxxx)
                                                --------
Funds From Operations (FFO)                      ₹ xxxx

6. Step 3: Sources and Applications of Funds

Sources of Funds (Inflows of Working Capital):

1. Funds from Operations (FFO)
2. Issue of Equity Shares or Preference Shares for Cash
3. Issue of Debentures or Raising Long-term Loans
4. Sale of Fixed Assets or Non-Current Investments

Applications of Funds (Outflows of Working Capital):

1. Funds Lost in Operations (Operating Loss)
2. Purchase of Fixed Assets (Land, Plant, Building)
3. Redemption of Preference Shares or Debentures
4. Repayment of Long-Term Loans
5. Payment of Cash Dividend and Tax

Final Balancing Test:

Total Sources of Funds - Total Applications of Funds = Net Increase / Decrease in Working Capital

(The difference between Sources and Applications must match the net figure from the Schedule of Changes in Working Capital!)

7. Summary & Quick Revision Checklist

• Fund: Defined as Net Working Capital (Current Assets - Current Liabilities).
• Rule of Flow: Happens only when a transaction touches one Current and one Non-Current account.
• Three-Step Model: 1. Schedule of Working Capital, 2. FFO computation, 3. Sources & Applications statement.
• Verification: Net working capital change from Step 1 must balance Step 3.