What is a Fund Flow Statement? Meaning, Format & Purpose

A Fund Flow Statement is a financial document that shows how funds were sourced and where they were applied between two balance sheet dates. It helps track working capital movements over a specific accounting period.

Let’s understand it with the help of an example:

Ravi’s stationery shop in Jaipur was checked in April 2023. ₹3,00,000 in current assets and ₹1,00,000 in current liabilities were found. By March 2024, the assets had grown to ₹4,50,000, and the liabilities had dropped to ₹80,000. So, working capital had been raised from ₹2,00,000 to ₹3,70,000, a rise of ₹1,70,000.

To know how this ₹1,70,000 change had happened, a Fund Flow Statement was created. It was shown that ₹1,00,000 came from business operations, ₹30,000 from selling old shelves, and ₹40,000 from issuing shares.

This money was used to buy a new printer for ₹60,000, repay a loan for ₹70,000, and pay dividends for ₹40,000. The total inflow and outflow were both ₹1,70,000. In this blog, the meaning, format, and purpose of a Fund Flow Statement will be explained. 

What is a Fund Flow Statement?

It is a financial report that shows how money was brought in and how it was used between two balance sheet dates.

The Funds Flow Statement explains the changes in working capital, which is the difference between current assets and current liabilities. It tells whether the company’s money was used well or not.

By checking this statement, it can be seen whether more money came in (inflow) or was spent (outflow). Businesses, banks, and investors use it to understand if the company can pay its bills on time.

The question “What is a Fund Flow Statement?” is often asked in accounting, because it gives a clear view of how funds were managed during a certain period, mostly one year.

Why Fund Flow Statement Important?

The Fund Flow Statement helps track how a company raises and uses funds over a period. It’s essential for understanding long-term financial health and resource allocation.

Meena owned a small online saree store. In April 2023, her business had ₹1,50,000 in assets and ₹50,000 in liabilities. By March 2024, her assets rose to ₹2,20,000, while liabilities came down to ₹40,000.

Working capital had increased from ₹1,00,000 (₹1,50,000 – ₹50,000) to ₹1,80,000 (₹2,20,000 – ₹40,000). A Funds Flow Statement was prepared. It was shown that funds came from good sales, old stock was sold, and a loan was taken. That money was used to buy new fabric, pay off debt, and give discounts.

Meena said with joy, "Bade bade shehron mein aisi chhoti chhoti baatein hoti rehti hain," as she finally understood how cash and profits were not the same.

Impact of Changes in Assets on Fund Flow
 

The Funds Flow Statement is very important for:
 

• Liquidity Check – It shows if money is available for regular use.
   
• Credit Decisions – Banks check this before giving loans.
   
• Better Planning – Managers use it to plan how to use funds in the future.

What is the Funds Flow Statement Analysis?

Funds Flow Statement analysis is done to compare two balance sheets, usually one from the start of the year and one from the end. This helps to explain how money was managed during that time.

When this analysis is done, it is checked:

• Where do funds come from?
   
• Where were they used?
   
• If working capital increased or decreased?

In Rakesh’s mobile repair shop, assets were changed, and loans were paid off. His balance sheets from 2023 and 2024 were compared. It was found that old equipment was sold, and new machines were bought. Money also came from a business loan.

This analysis helped Rakesh understand his fund movements. He was surprised and said, “Main aaj bhi phenke hue paise nahi uthata,” when he saw that small changes had big effects on his funds.

Impact of Changes in Liabilities on Fund Flow
 

How is a Fund Flow Statement Prepared?

The Fund Flow Statement is prepared in three steps. It helps explain changes in working capital using simple calculations. Each step must be done properly.

Step 1: Statement of Changes in Working Capital

Working capital is found by subtracting current liabilities from current assets.

Formula:
Working Capital = Current Assets – Current Liabilities

Example:
Pooja’s home bakery had ₹2,00,000 in assets and ₹1,00,000 in liabilities in 2023. In 2024, assets increased to ₹2,50,000 and liabilities dropped to ₹90,000.

So, working capital increased from ₹1,00,000 to ₹1,60,000.

Example of Changes in Working Capital

Pooja’s working capital was increased by ₹60,000. This increase was recorded in the Funds Flow Statement.

Step 2: Funds from Operations

Funds from business activities are added. Non-cash items like depreciation are adjusted.

Formula:
Funds from Operations = Net Profit + Non-Cash Expenses – Non-Operating Income

Example:
Ravi Ltd. earned ₹1,00,000 in profit. ₹20,000 depreciation was added. ₹10,000 income from selling assets was subtracted.

Funds from Operations = ₹1,00,000 + ₹20,000 – ₹10,000 = ₹1,10,000

Step 3: Final Fund Flow Statement

All the fund movements are brought together, money in and money out.

Sample Funds Flow Statement
 

When inflow and outflow are equal, good fund management is shown. As Shah Rukh once said, “Keh diya na, bas keh diya”, everything adds up when a Fund Flow Statement is prepared properly.

Uses of the Fund Flow Statement:

The Fund Flow Statement is used to understand how money moved in and out of a business over a period. It supports better financial control and planning.

• It is used to track changes in working capital, such as stock or debtor increases.
   
• It is used to plan future financial needs based on past fund movements.
   
• It is used to explain the gaps between profit and available cash.
   
• It is used to identify liquidity issues, especially when expenses cannot be met.
   
• It is used by banks to check the financial health of a business before giving loans.
   

Limitations of the Fund Flow Statement:

Even though the Fund Flow Statement is useful, some limits must be noted.

• It is based on past balance sheets, so it gives only historical data.
   
• It does not show daily cash movements like a Cash Flow Statement does.
   
• Non-fund items such as depreciation are included, which may confuse real cash flow.
   
• Small short-term changes in assets or liabilities may be ignored, even if they affect liquidity.
   
• It is not suitable for very short periods, like a week or a month.

Form 60 and Financial Records

When a PAN card is not available, Form 60 is used. It must be submitted before any high-value transaction, like opening a bank account or buying a car. This helps keep records clear and avoids tax issues.

What is a Fund Flow Statement? It is a document that supports financial clarity. Just like Form 60 tracks large transactions, the Funds Flow Statement tracks how business funds move over time.

For example, if a loan is taken without a PAN, Form 60 is submitted. Later, when preparing the Funds Flow Statement, that loan is shown as a source of funds.

Conclusion

The question “What is a Fund Flow Statement?” has now been answered with full clarity. It is a report that shows where money came from and where it was spent between two dates. By preparing this statement, better financial planning can be done, loans can be managed, and cash gaps can be understood. 

It is not only used by business owners but also by banks and investors to check financial health. Even though it has limits, the Fund Flow Statement gives a true picture of fund movement, helping with smarter financial decisions.

FAQs

Q1. What is a Fund Flow Statement?
It is a financial report that shows how funds came in and how they were spent during a period, usually one year.

Q2. Is a Fund Flow Statement different from a Cash Flow Statement?
Yes. A Fund Flow Statement tracks changes in working capital. A Cash Flow Statement only tracks cash and bank balances.

Q3. How is working capital calculated?
Working Capital = Current Assets – Current Liabilities

Q4. What are the sources of funds?
Sources include profit from operations, sale of assets, loans taken, or shares issued.

Q5. Why is a Fund Flow Statement useful for banks?
Banks use it to check if a business can repay loans. It shows fund management and financial health over time.
 

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