There are Advantages and Disadvantages of Fund Flow Statement. They should be considered before forming any view of the sources and uses of funds.
Table of Contents
- 1 Fund Flow Statement in Brief
- 2 Advantages and Disadvantages of Fund Flow Statement
- 3 Advantages of Fund Flow Statement
- 4 Disadvantages of Fund Flow Statement
Fund Flow Statement in Brief
A balance sheet states the position of the company as on a particular date whereas a fund flow statement reflects the inflow and outflow of funds over two balance sheet dates. Since fund flow is a statement which shows the flow of funds over two periods, it is also called as a statement of changes in financial position. This statement simply shows the changes in the working capital of the company.
Advantages and Disadvantages of Fund Flow Statement
A detailed analysis of the fund flow statement can provide substantial insight into a company given the benefits one can draw from it. Let us look at the advantages and disadvantages of the statement.
Advantages of Fund Flow Statement
Changes in The Financial Position of the Company
Fund flow statement portrays the movement of the funds and changes in the financial position of the company between two accounting periods, which the balance sheet or the profit and loss statement fail to provide.
Reason for Changes in the Financial Position between Two Accounting Periods
It helps in analyzing the reasons for changes in the financial position of the company. It helps the analyst to understand if the increase in funds is due to the sale of assets or improvement in company performance. It helps to answer the questions like why is the firm making loss despite being financially sound and vice versa.
Level of Working Capital Adequacy
This statement helps to test if working capital has been effectively used or not. It helps to understand if short-term sources of funds are used to build long term assets and vice versa. Overall it aids better working capital management for the firm.
Future Business and Budget Projections
Projected fund flow statements can be used for putting up necessary controls and budgetary allocations. Projected statements aid in deciding future financial policies like credit period, inventory requirement etc. for the company.
A well-managed working capital firm earns high respect among shareholders and increases credit-worthiness among creditors. An effectively managed fund flow activity of the firm can help the company to build a good reputation for itself with respect to its efficiency and credit worthiness.
Disadvantages of Fund Flow Statement
Although fund flow statement is very important and has a lot of advantages, there are some limitations of fund flow statement given below:
Fund Flow statement is said to lack originality because this statement is merely a systematic rearrangement of items in financial statements over two accounting periods. It is because of this reason that many companies avoid preparation of fund flow statement.
Based on Historical Data
This statement only shows how the company has performed in the previous year and does not give much clarity of current and future costs of the company. Hence, realistic comparison of the profit position of the company is not shown. Also, projected fund flow statement is also not very accurate.
Goes Hand In Hand with Cash Flow Statement
Fund flow statement does not give the cash position of the company. It does not even classify the financing and investing activities of the company. Hence, most of the times, a company that prepares a fund flow statement has to prepare a cash flow statement as well to get an idea about the liquidity position of the company.
Cannot be Used on Standalone Basis
Since this statement only gives an idea of changes in working capital of the company, it cannot be used standalone, without a balance sheet and profit and loss statement. Hence, a fund flow statement can, in no way, substitute financial statements.
A fund flow statement takes into consideration two particular time periods for the purpose of analysis of working capital. Hence, it cannot depict continuous changes. Also, it does not take into consideration noncash items in the company which, in actual accounting, play an important role in many companies.