What are the components of a Fund Flow Statement | ApnaCourse

by | Nov 10, 2016 | Financial Management


Conversation Between



 Manu and Vinu about
Fund Flow Statement

Manu Hi Vinu! How are you?
Vinu I am not fine Manu!
Manu Why?
Vinu I think I didn’t take my IPCC Course seriously!
Manu Common yaar! Wats up?
Vinu Yesterday I was asked to prepare and present Fund Flow Statement of corporate customer who has approached our Bank for a loan.
Manu Ok!
Vinu I had this topic for learning in both Accounting as well as Financial Management papers.
Manu Ya! I know.
Vinu But I didn’t give serious look on the topics, because problems would be generally lengthy in nature and I am bit allergic to lengthy problems.
Manu So?
Vinu So, I skipped this entire topic and focused on the other topics and somehow sailed through the examinations!
Manu Acha! You escaped academic examinations but caught red handed in real life examination!
Vinu True!
Manu So what are you going to do now?
Vinu What I’ll do is I’ll learn from you!
Manu He he…That’s my privilege!
Vinu Let me ask you a fundamental question!
Manu Please!
Vinu When the customer already prepares Financial Statements comprising

a) Statement of Profit and Loss;

b) Balance Sheet

c) Cash Flow Statement

Why we have to prepare another statement called Fund Flow Statement to analyse the customer? It’s a waste of time!

Manu Vinu! Be careful in your words! Then why that particular topic is given so much importance by having it in two examination papers and more importantly why you’re Bank is asking to analyse it?
Vinu Ok! So it has something to communicate very seriously!
Manu Yes! Absolutely.
Vinu But before that, please tell me, why the same topic (Fund Flow Statement) in included in two examination papers?
Manu Vinu! You should have asked this when you studied. Glad that at least now you have asked.

You had this topic in Accounting paper to learn how to prepare Fund Flow Statement.

The same topic was also included in Financial Management to learn how to analyse the Fund Flow Statement.

Vinu Ok…. Ok…So, two target groups were kept in mind, I believe.

How to prepare – As an Accountant

How to analyse – As a user of Financial Statement.

Manu Yup…Shall we move on?
Vinu Yes Guruji!
Manu Fund Flow Statement is a statement which will show inflow and outflow of long term funds so that reader of the financial statement will know from where funds have been generated and where they are used!
Vinu Manu!!!! Please Stop!!!! Don’t teach definitions. Explain with some practical examples yaar!!!
Manu Ok. Let us go through a Financial Statement tour to understand.
Vinu I am ready.
Manu Let’s say you want to start a business with some decent amount. How much you will be investing?
Vinu One Hundred Crores.
Manu Great yaar! What you will do with that?
Vinu I will purchase assets!
Manu What assets?
Vinu Long term assets as well as Short term Assets. (Last week you taught me Working Capital )
Manu Name some assets which you will be acquiring.
Vinu Fixed Assets – Rs.80 Crs;

Current Assets – Rs.20 Crs.

Manu Can you prepare your Balance Sheet?
Vinu Yes! I can.

Liabilities Amount (Rs. In Cr.) Assets Amount (Rs. In Cr.)
Capital 100.00 Fixed Assets 80.00
Current Assets 20.00
Total 100.00 Total 100.00
Manu Good! Do you know, now you can prepare your Fund Flow Statement?
Vinu Is it?
Manu Yes! What are the sources of funds for you so far?
Vinu So far, it’s only capital!
Manu What are your uses of funds?
Vinu I have two uses.

1) Fixed Assets.

2) Current Assets

Manu Correct. But in Fund Flow Statement, we will show long term source of funds and long term use of funds. Now, tell me, what are your long term sources and uses.
Vinu I got your point. I have one long term source whereas out of two uses, one is long term use and the other one is short term use.
Manu Exactly. If your long term funds are greater than long term use, you will have surplus, and that will be used for funding your current assets.
Vinu Correct. Shall I prepare Fund Flow Statement with this information?
Manu Please Vinu.
Vinu Fund Flow Statement

Source of Funds
Capital 100.00
Total Source (A) 100.00
User of Funds
Fixed Assets 80.00
Total Use (B) 80.00
Surplus (A-B) 20.00


Correct me, if I am wrong!

Manu You are correct! Please give the interpretation also.
Vinu I have brought in Rs.100 Crs as capital of which 80 Crs (80%) has been used for creating fixed assets. I had surplus of 20 Crs (20%) which I have used for creating current assets.
Manu What does this indicate?
Vinu This indicates all my current assets were funded by my own money. So I don’t have liquidity pressure, because I need not pay any one in the short run.
Manu Exactly!
Vinu Wow! I am understanding Fund Flow Statement.
Manu Wait. Let’s dig deeper.
Vinu Ok.
Manu What was your total current asset?
Vinu It is Rs.20 Crs.
Manu Can you give break up?
Vinu May be Raw Material of Rs.15 Crs and Cash and Bank Balance of Rs.5 Crs
Manu Ok. Expand your balance sheet with this information.
Vinu Ok. Let me do that.

Liabilities Amount (Rs. In Cr.) Assets Amount (Rs. In Cr.)
Capital 100.00 Fixed Assets 80.00
Current Assets
Raw Material 15.00
Cash and Bank 5.00
Total 100.00 Total 100.00
Manu Good! Now what you will do with your Raw Material and Cash Balances?
Vinu I will use them for production, incur manufacturing and other expenses.
Manu Ok. Let us assume, you are using Rs.13 Crs worth of RMs and Rs.4 Crs Cash balances for Production.
Vinu So, my total cost of production will be Rs.17 Crs.
Manu Let’s say, you sell all your production for Rs.20 Crs.
Vinu Ok. So, my sales is Rs.20 Crs, Cost is Rs.17 Crs and profit is Rs.3 Crs.
Manu Correct. Can you prepare your Profit and Loss statement now?
Vinu Sure.

Income Statement
Income 20.00
Less: Expenses 17.00
Profit 3.00
Manu Will all your sales be in cash?
Vinu No way! Now days, we don’t get payments even for credit sales on time. Then where is the question of all cash sales. We can assume 60% as Credit Sales and 40% as Cash.
Manu So your credit sales are going to be reflected as Debtors.
Vinu Yes. Rs.12 Crs (60% of Rs.20 Crs) will be reflecting as Debtors and my cash balance will go up by Rs.8 Crs.(40% of Rs.20 Crs).
Manu When you give credit sales, you can also ask for credit purchase right?
Vinu Yes. I can. But as per Balance Sheet, all my purchases are by cash only. Probably the next purchases, I’ll make it through credit.
Manu Good! You are sharp now. You cannot talk about credit purchases now, because you have already made purchases through cash.
Vinu Ya!
Manu Now can you prepare your Balance Sheet?
Vinu Yes. I will have some new entries like retained profits, debtors, change in Raw Material and Cash Balances.
Manu Before that, arrive at your cash balance:
Opening Balance 5.00
Less: Used for Manufacturing Expenses 4.00
Add: Cash Sales 8.00
Closing Balance 9.00
Manu Good! Go ahead with Balance Sheet!
Liabilities Amount (Rs. In Cr.) Aseets Amount (Rs. In Cr.)
Capital 100.00 Fixed Assets: 80.00
Current Assets:
P&L (Retained Profits) 3.00 Raw Material 2.00
Debtors 12.00
Cash and Bank 9.00
Total 103.00 Total 103.00
Manu Good!
Vinu But Manu, where are we going? You said, you will help me preparing Fund Flow and Analysing it. But you are taking me through Accounting!
Manu Don’t worry! I am doing this with an intention. Now can you prepare your fund flow statement?
Vinu Now? Let me try.

Total Sources now are

a) Capital

b) Retained Profits.

I have a doubt now. Whether retained profits are long term funds? Is it not distributable to owners as dividend and is it not short term?

Manu For that, tell me, whether Capital is long term fund or short term fund?
Vinu Obviously, it is long term fund. It has to be paid back only in the event of winding up.
Manu If Capital is long term fund, which is owners’ funds, then Retained Profits is also long term funds, because it is also payable to owners only.
Vinu Correct. Retained Profits are owner funds and they are long term funds.
Manu Your focus should be on profits generated and not on retained profits. Because, once profit is generated, it becomes long term funds and any usage out of it will become long term use.
Vinu Correct! In our case, my focus should be on Profits generated which is Rs.3 Crs and it is a source.

Total Sources are

a) Capital

b) Funds from Operations.

Manu Kudos for that correction.
Vinu Now shall I prepare the fund flow statement?
Manu Please!
Source of Funds
Capital 100.00
Funds from Operations 3.00
Total Source (A) 103.00
Use of Funds
Fixed Assets 80.00
Total Use (B) 80.00
Surplus (A-B) 23.00
Manu You have surplus of Rs.23 Crs. It can be used for?
Vinu It has been used for funding current assets like this:

Raw Materials 2.00
Debtors 12.00
Cash and Bank 9.00
Total 23.00
Manu Correct. Now let us assume we have completed one full year of operations and we get into the next year.
Vinu Ok.
Manu Now only the real drama starts! You now become so enthusiastic in your business operations, want to expand your business, raise more funds and want to be more vibrant.
Vinu Me? Ok! I’ll leave it to your imagination!
Manu Let’s say you want to purchase another Plant and Machinery at a cost of Rs.50 Crs so you can improve your sales by another Rs.50 Crs per year and profit by another Rs.5 Crs.
Vinu It sounds very illogical. When I have not even stabilised with my current operations, why are you saying I should expand?
Manu Vinu. It all happens in Industry. Do you know one thing? Fund flow will throw all illogical financial stuffs done by the business entities!!!
Vinu Is it so? Then I am ready to expand more 
Manu You are going to bring in fresh capital of Rs.10 Crs for this Plant and Machinery.
Vinu But that’s only Rs.10 Crs. My requirement is Rs.50 Crs?
Manu Don’t worry. You have some cash balance too. For the balance arrange some short term funds.
Vinu I had cash balance of Rs.9 Crs. I am also going to raise Rs.10 Crs capital. So funds have to be arranged for Rs.31 Crs. But I have a question. Can i use short term borrowings for acquiring Plant and Machinery?
Manu No! But short term borrowing is going to give you cash and you may use that and find some long term funds later as a substitute.
Vinu It’s a Criminal Mistake!
Manu Don’t worry. Let us go ahead! Please prepare your Balance Sheet first.
Liabilities Amount (Rs. In Cr.) Assets Amount (Rs. In Cr.)
Capital 100.00 Fixed Assets 130.00
Additional Capital 10.00 Current Assets:
P&L (Retained Profits) 3.00 Rae Material 2.00
Short Term Borrowing 31.00 Debtors 12.00
Cash and Bank
Total 144.00 Total 144.00
Manu Now you have to procure raw materials for this year sales.

Your last year sales were Rs.20 Crs. For that your RM was Rs.13 Crs and other expenses were Rs.4 Crs.

Vinu Correct!
Manu Current year also you will repeat the same plus additional sales.
Vinu Correct!
Manu Can you tabulate that for understanding?
Vinu Will do that:

Particulars With Existing Capacity With New Capacity Total
Sales 20.00 50.00 70.00
RM Consumption 13.00 38.00 (51.00)
Other Expenses 4.00 7.00 (11.00)
Profit 3.00 5.00 8.00
Manu So it means, you are going to consume Rs.51 Crs worth of Raw Materials.
Vinu Yes!
Manu Do you have Raw Materials with you?
Vinu My Balance Sheet says, i have Rs.2 Crs worth Raw Materials. But my requirement is Rs.51 Crs worth Raw Materials.
Manu So, you have to purchase RM worth Rs.49 Crs. But you don’t have cash balance. You have to be dependent on your cash sales for purchase of RM. So, ascertain cash inflows from sales.
Vinu I don’t have any information on that!
Manu Then take this shock! Your Credit sales are going to increase to remain competitive in the market. Your total sales are Rs.70 Crs of which 80% is going to be on credit
Vinu So, I will have debtors of Rs.56 Crs. Already I had debtors of Rs.12 Crs
Manu So your total debtors will be Rs.68 Crs. But find out your cash sales.
Vinu Cash sales will be Rs.70 Crs x 20% = Rs.14 Crs
Manu So please prepare cash statement to know cash generation.
Opening Balance
Add: Cash Sales (20% of Rs.70 Crs) 14.00
Cash Generation 14.00
Manu Make use of cash generated to purchase goods and calculate how much should be purchased on credit
Raw Materials requirement 51.00
Less: RM Stock available 2.00
Raw Materials to be purchased 49.00
Less: Cash purchase with cash generated 14.00
Raw Material purchase to be made in Credit 35.00
Manu So now you have exhausted all your cash balance!
Vinu Yes Yes Yes! Alas! Also have other expenses for Rs.11 Crs! How will I pay them?
Manu Those expenses will remain as Liabilities till they are paid off.
Vinu True. That too current liability because of its operative nature. But why do you create all these mess?
Manu Only then you will understand the real purpose of Fund Flow Statement. I am taking you through a real business scenario!
Vinu Ok!
Manu Now let us reconcile to prepare Balance Sheet. Will you have RM Stock?
Vinu No. As per working, we consumed all RM Stock.
Manu Will you have debtors?
Vinu Yes. Rs.68 Crs
Manu Will you have Cash Balance?
Vinu No! All are consumed.
Manu Correct! Now please prepare your Balance Sheet.
Libilities Amount

(Rs. In Cr.)

Assets Amount

(Rs. In Cr.)

Capital 100.00 Fixed Assets 130.00
Additional Capital 10.00 Current Assets:
P&L (3 Crs + 8 Crs) 11.00 Raw Material Nil
Bank Overdraft 31.00 Debtors 68.00
Sundry Creditors 35.00 Cash and Bank
Expenses Payable 11.00
Total 198.00 Total 198.00
Manu Can you reproduce two years balance sheet and Income statement in one place?
Vinu Ya!


Liabilities Amount




Assets Amount




Capital 100.00 100.00 Fixed Assets 130.00 80.00
Additional Capital 10.00 Current Assets:
P&L (3 Crs + 8 Crs) 11.00 3.00 Raw Material Nil 2.00
Current Liability: Debtors 68.00 12.00
Bank Overdraft 31.00 Cash and Bank 9.00
Sundry Creditors 35.00
Expenses Payable 11.00
Total 198.00 103.00 Total 198.00 103.00



Particulars Total
Sales 70.00
RM Consumption (51.00)
Other Expenses (11.00)
Profit 8.00
Manu In this entire exercise, we have not touched on Depreciation. Let us not touch on that now.
Vinu Ok.
Manu Now, try preparing the Fund Flow Statement. What are long term sources for this company now?
Vinu Additional Capital of Rs.10 Crs when compared with Previous Year and Funds from Operations Rs.8 Crs
Manu So your total long term funds is Rs.18 Crs
Vinu Yes.
Manu What are your long term uses?
Vinu It is Rs.50 Crs of Plant and Machinery when compared with previous year.
Manu Here comes the catch. Go ahead and prepare your Fund Flow Statement.
Source of Funds
Capital 10.00
Funds from Operations 8.00
Total Source (A) 18.00
Use of Funds
Fixed Assets 50.00
Total Use (B) 50.00
Deficit (A-B) (32.00)
Manu Now, what does your fund flow communicate?
Vinu Its communicating something very basic, but very serious.


I had long term source of Rs.18 Crs




My long term use was Rs.50 Crs


I had a deficit of Rs.32 Crs

Manu It means you have used some other funds for creating long term assets.
Vinu Yes
Manu Which Funds?
Vinu I have used the funds meant for Working Capital purposes.
Manu Yes. You have committed the crime of using short term funds for long term purposes.
Vinu Yes. I understand. But I am struck here. Can you elaborate this?
Manu Ya. Previous year your working capital requirement was Rs.23 Crs and that was funded fully by own funds.


But current year, your Gross Working capital fund requirement was Rs.68 Crs. (i.e, Current Assets). But against this you had current liability of Rs.77 Crs. You had negative working capital.

Vinu What does that mean?
Manu It means, you have to pay Rs.77 Crs in the short term as your liability, where as you have only Rs.68 Crs as resource available to pay that! You have used short term funds to the tune of Rs.9 Crs for creating long term assets. This will have serious bearing on the operations of the company.
Vinu But why?
Manu Your short term funds were locked in long term assets.


Those who have lent you in short term will ask for repayment in the short term. At that point, you should have short term assets (resources) to pay short term lenders. But now your funds were locked in long term assets and you cannot dispose those assets soon.


So, short term lenders will take you for a ride.


That would be a disastrous ride, sometimes even leading to winding up of the company, if they are not paid as agreed!!!

Vinu Getting your point!


Let me tabulate that:

Particulars Previous Year Current Year
Current Assets 23.00 68.00
Less: Current Liability 77.00
Working Capital 23.00 (9.00)
Reduction in Working Capital 32.00


I have used this reduction in Working Capital to fund Fixed Asset creation. I think this is the amount revealed by Fund Flow Statement.

Manu Exactly!


Fund Flow Statement (FFS) shows how irrational you are!


You have attempted to create long term asset to the tune of Rs.50 Crs by arranging long term funds of just Rs.18 Crs and relying predominantly on short term funds of Rs.32 Crs.


FFS shows you want to run business with others funds, especially funds which can put lots of pressure on liquidity of your business.


FFS shows solvency of your business is always under pressure and threat!


FFS shows you wanted to create assets even before you stabilise in your operations!


FFS shows you are very poor in Working Capital Management!


Your FFS shows, you have cheated your banker, because you have availed cash credit but in turn used it for creating fixed assets!

Vinu My God! Whether Fund Flow is such a dangerous monster?
Manu Yes! If you’re activities are monstrous, illogical, detrimental, you have to be cautious about this guy – Mr. Fund Flow Statement. He is there to reveal what you do!
Vinu Thanks Manu! Now I understand why banks are so serious about this statement and why it is considered as critical topic in two examination papers. Thanks a lot!
N Raja CA, A Practicing Chartered Accountant with tonnes of passion for teaching. He also holds a PGDBA – Finance from Symbiosis SCDL and a B.Com., from Loyola College, Chennai. Read More.

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