In everyday practice, the terms “cash flow statement” and “fund flow statement” are often used interchangeably. But when it comes to accounting, the two financial reporting tools have considerable differences in their scope, indicators, calculation, utility, and relevance.
As the name suggests, the cash flow statement details a company’s cash inflows and outflows over a specific period, focusing on liquidity. Meanwhile, a fund flow statement analyzes the shift in the working capital in a specific period, and focuses mainly on sources and uses of funds. (providing you with a much broader picture than just cash)
This blog breaks down both financial statements, highlights their key differences, and explains how each is prepared, based on standard financial reporting practices.
Table of Contents:
What is a Cash Flow Statement?
Before diving into the statement itself, let’s first understand what cash flow means. Cash Flow refers to money coming into and going out of an entity over a certain period of time, including both cash and its equivalent, like bank deposits and short-term investments.
An entity could be a business, a government body, a nonprofit organization, or any independent unit that manages its finances and prepares financial reports.
Now we come to the biggest indicator of all:
- A positive cash flow means the entity brought in more cash than it spent.
- A negative cash flow means more cash went out than came in.
This is where the Cash Flow Statement comes into picture. By definition, a cash flow statement tracks the actual movement of cash—how much was received, how much was spent, and what changed during the period. In simple terms, it connects the profit shown in the books with the real cash available to the business.
The cash flow statement is prepared for a specific period. This could be a full year, a quarter, or a half-year, depending on how often the entity reports its finances.
What is a Fund Flow Statement?
A Fund Flow Statement helps explain how a company’s financial position has changed between two points in time. It focuses on one key measure: working capital, which is the difference between current assets and current liabilities.
Unlike the Cash Flow Statement, which deals with actual cash movement, the Fund Flow Statement shows how funds were sourced and applied within the business. It looks beyond short-term liquidity to capture broader financial shifts.
The statement looks into two things:
- Sources of funds: where the company got its money, like issuing shares, borrowing long-term debt, or selling fixed assets
- Uses of funds: where that money went — like buying new equipment, repaying loans, or increasing current assets
A specific question it answers is: If our working capital increased or decreased during the year, what were the underlying factors that contributed to that change?
The Fund Flow Statement is usually prepared annually, using a comparison of two balance sheets. It helps business owners, analysts, and lenders understand how a company is managing its resources, making investment decisions, and financing its operations over time.
Difference Between Cash Flow Statement and Fund Flow Statement
Understanding the difference between cash flow and fund flow statement helps uncover how a company manages both its liquidity and long-term financial planning. Strong businesses don’t just depend on profits. They rely on clarity. This clarity results from knowing how financial decisions are influencing the company’s future as well as how much cash is available right now. Both the Fund Flow Statement and the Cash Flow Statement are helpful in this situation.
These tools are not in competition with one another; instead, they work side by side, each showing a different aspect of the same financial journey.
- The Cash Flow Statement gives a snapshot of liquidity.
It lets you know if the company is making enough money to cover its short-term expenses. It documents the amount of money received, spent, and the net outcome for a specific period.
- The Fund Flow Statement examines the financing of the company.
It focuses on longer-term changes in working capital and demonstrates the sources and uses of the funds. It provides insight into the management, investment, and restructuring of capital.
Cash Flow vs Fund Flow: Tracking Cash vs Tracking Capital
| Aspect |
Cash Flow Statement |
Fund Flow Statement |
| Purpose |
Tracks actual cash and cash-equivalent movement during a specific period |
Explains changes in working capital between the two balance sheet dates |
| Focus |
Liquidity and short-term cash management |
Financial strategy and long-term resource allocation |
| Basis of Analysis |
Cash and cash equivalents |
Working capital (Current Assets – Current Liabilities) |
| Reporting Frequency |
Usually prepared quarterly or annually |
Typically prepared annually |
| Data Source |
Income Statement and Balance Sheet |
Two consecutive Balance Sheets |
| Includes |
Operating, Investing, and Financing Activities |
Sources and Applications (Uses) of Funds |
| Inflow Examples |
Sale of goods (operating), sale of equipment (investing), loan received (financing) |
Issue of shares, taking long-term loans, and the sale of fixed assets |
| Outflow Examples |
Payment to suppliers, salaries, tax payments, asset purchases, and dividend payments |
Repayment of long-term loans, purchase of fixed assets, and an increase in current assets, like inventory |
| Period Covered |
A specific accounting period (e.g., Q1 FY25, FY24) |
Comparison between two dates (e.g., FY23 vs FY24) |
| Key Indicator Measured |
Net change in cash |
Net change in working capital |
| Usefulness |
Helps assess daily liquidity and operational cash position |
Helps understand funding patterns, capital allocation, and internal financial discipline |
| Users |
Management, investors, auditors, and tax authorities |
Management, banks, creditors, long-term investors, and financial analysts |
| Regulatory Requirement |
The applicability of the cash flow statement is mandated by the Companies Act, 2013, for listed and certain public companies. |
Not mandatory, but used as a financial planning tool |
Let’s say:
- A business reports strong profits but is struggling to pay its suppliers because most of the revenue is still tied up in unpaid invoices.
That shows up as a warning in the cash flow statement.
- Another business might have less cash on hand, but only because it made significant investments in long-term assets or a newly constructed plant. That is better understood through the fund flow statement, which shows this as a strategic financial decision.
Together, these two statements offer a more complete financial picture:
- One focuses on the day-to-day impact of money movement
- The other tracks how the company is positioning itself for the future
Where the Cash Flow Statement is part of statutory financial reporting under Indian Accounting Standards for many companies, the Fund Flow Statement is more often used for internal analysis or specific financial review processes.
Need for Cash Flow Statement vs Fund Flow Statement Explained
Why Do We Need a Cash Flow Statement?
To understand why a Cash Flow Statement matters, let’s step back and look at how accounting works. In India, businesses usually follow one of two accounting methods: cash accounting or accrual accounting.
- Under cash accounting, income is recorded only when money is received, and expenses only when they’re paid.
- In accrual accounting, income is recorded when it’s earned, and expenses when they’re incurred — even if no money changes hands. For example:
If a business sells ₹1,00,000 worth of goods to a customer in March, but the customer promises to pay in April, the business will still record the ₹1,00,000 as revenue in March. On paper, it looks like profit, even though the money hasn’t arrived yet.
Most companies in India are required to follow accrual accounting under the Indian Accounting Standards (Ind AS), as prescribed by the Companies Act, 2013.
This Act also mandates the preparation of a Cash Flow Statement as part of financial reporting for certain classes of companies, such as listed companies and public companies above a specific threshold.
But here’s the catch —
An Income Statement built on accrual accounting might show a profit, even if the business hasn’t received any cash. This is where the Cash Flow Statement becomes essential.
Why Do We Need a Fund Flow Statement?
Short-term financial gain is only one aspect of the situation. How is the business being financed, and where are the funds going? This is a more general financial question that a fund flow statement helps address.
It examines changes that take place below the surface, such as how loans are disbursed, capital is raised, and resources are moved between long-term uses. It gives insight into whether a business is rerouting funds in a way that might affect stability in the future, overstretching itself, or fortifying its position. For instance:
Imagine a company that’s running low on cash but is aggressively investing in long-term assets, buying new machinery, expanding facilities, or setting up a new plant. On paper, its cash position might look weak. But a Fund Flow Statement would show that its working capital has shifted toward strategic growth.
Because of this, it is a useful tool for both external stakeholders and internal management.
The Fund Flow Statement is used by banks, creditors, and venture capitalists to assess a company’s financial management. It helps them understand how working capital is evolving and whether those changes are indicative of good financial management.
The Fund Flow Statement is a crucial component of the overall picture because, in contrast to cash flow, which concentrates on liquidity, it shows the company’s financial strategy over time.
How is the Cash Flow Statement Made?
The Cash Flow Statement is one of the primary financial statements prepared by businesses, alongside the Balance Sheet, Income Statement, and (in some cases) the Statement of Changes in Equity.
It’s built using data from two key places:
- The Income Statement, which provides the net profit or loss
- The Balance Sheet, which shows changes in assets and liabilities over the period
The standard cash flow statement format includes three sections: Operating, Investing, and Financing Activities.
- Operating Activities: Cash from daily business operations like sales, payments to suppliers, salaries, and taxes
- Investing Activities: Cash spent on or earned from buying and selling assets like property, equipment, or investments
- Financing Activities: Cash raised from or paid to lenders and shareholders, such as loans, equity capital, and dividends
All three sections are added up to show how much the cash position has changed, and whether the company ended the period with more or less cash than it started with.
How is the Fund Flow Statement Made?
One important financial report that shows how a company’s working capital has changed over time is the Fund Flow Statement. It looks beyond cash to demonstrate how long-term funds were obtained and used in various business divisions.
Two sources of information are used in its preparation:
- The balance sheet at the start and finish of the reporting period
- Some more information about transactions, such as the issuance of shares, the purchase or sale of fixed assets, or the repayment of long-term loans
The typical fund flow statement format includes a working capital schedule and a statement of sources and applications of funds.
1. Statement of Changes in Working Capital
This part compares the company’s current assets and current liabilities between two points in time.
If working capital increases → it’s a use of funds.
If working capital decreases → it’s a source of funds.
2. Statement of Sources and Applications of Funds
All long-term funding inflows and sources are listed in this section, including the proceeds from the sale of fixed assets, borrowing, and equity issuance.
It also records how those funds were applied, like buying new machinery, paying dividends, or reducing debt.
It also documents the use of those funds, such as debt reduction, dividend payments, or the purchase of new equipment. When these two components are combined, the final statement describes how the company handled its finances outside of regular business operations. It shows the flow of capital, the amount reinvested, and whether the business is strengthening its finances over the long run.
Advantages and Disadvantages of Cash Flow and Fund Flow Statements
Both statements offer valuable insights into a company’s financial operations, but they are built for different purposes. Here’s how their strengths and limitations compare:
| Statement |
Advantages |
Disadvantages |
| Cash Flow Statement |
– Provides a clear view of actual cash availability
– Helps manage liquidity effectively
– Useful for short-term planning and operational control
|
– Ignores non-cash components like depreciation
– Does not reflect the overall financial strategy
– May mislead if viewed without the context of other statements
|
| Fund Flow Statement |
– Highlights changes in working capital
– Shows how long-term funds are sourced and used
– Useful for strategic financial planning and investment decisions
|
– Does not track daily cash transactions
– Less relevant for short-term decision making
– Cannot substitute for a cash flow statement
|
Reading Between the Lines of Financial Flow
A business may appear profitable on paper but still face cash shortages, or vice versa. Because of this, depending solely on one financial statement may be deceptive. Together, the cash flow and fund flow statements provide long-term financial strategy as well as short-term liquidity insights. Entrepreneurs, analysts, and decision-makers who are proficient in reading and preparation will be better able to assess solvency, sustainability, and future growth in addition to financial results.
Difference Between Cash Flow Statement and Fund Flow Statement- FAQs
1. What is the difference between cash flow and fund flow statements?
Cash flow statements track the actual inflow and outflow of cash within a specific period, focusing on liquidity. Fund flow statements analyze changes in working capital between two balance sheet dates, showing how long-term funds are sourced and applied.
2. What is the purpose of a cash flow statement?
The purpose of a cash flow statement is to measure a company’s ability to generate cash to meet short-term obligations. It helps in assessing operational efficiency, liquidity, and financial stability.
3. How is a fund flow statement prepared?
A fund flow statement is prepared using two consecutive balance sheets. It involves two steps: first, calculating changes in working capital; second, listing the sources and uses of long-term funds over that period.
4. Why do companies need both the fund flow and cash flow statements?
Cash flow statements provide real-time cash visibility for operational decisions. Fund flow statements give insight into long-term resource allocation and financial planning. Together, they offer a complete view of a company’s financial health.
5. Is the cash flow statement mandatory in India?
Yes, under the Companies Act, 2013, the cash flow statement is mandatory for certain classes of companies, including listed companies and larger public companies. The fund flow statement is not mandatory but is often used for internal analysis.