Understanding the difference between cash flow and fund flow statement is important to gain a better picture of a company’s financial stability and operational efficiency. This is because all businesses manage money and make financial statements to evaluate their liquidity and overall financial health.
Among these, cash flow and fund flow are key tools that help investors, management, and creditors make informed financial decisions. Both of the statements track the movement of funds; however, they serve different purposes.
This blog will explain the difference between Cash Flow Statement and Fund Flow Statement by giving you a detailed comparison of Cash Flow Statement and Fund Flow Statement, along with their definitions, usage, and formats.
Table of Contents:
So, let’s get started with a brief tabular difference between cash flow and fund flow statement!
Brief Tabular Difference Between Cash Flow and Fund Flow Statement:
| Basis |
Cash Flow |
Fund Flow |
| Definition |
Cash flow is based on the concept of outflow and inflow of cash and cash equivalents during a particular period |
Fund flow is based on the concept of changes in working capital over a period of time |
| What is calculated? |
Cash from the operations is calculated |
Funds from the operation are calculated |
| What it shows |
It shows the short-term position of the business |
It shows the position of the business in the long term |
| Purpose |
To show the movement of cash during the beginning and end of an accounting period |
To show the changes in the financial position of the business between the previous and current accounting periods |
| Discloses |
Inflows and Outflows of cash |
Source and application of the available funds |
| Accounting Basis |
Cash Basis of accounting |
Accrual basis of accounting |
| Part of Financial Statement |
Yes |
No |
| Used for |
Cash Budgeting |
Capital Budgeting |
But before understanding the Cash Flow Statement, first, you should know what Cash Flow is.
What is Cash Flow?
The term Cash Flow combines two words: Cash, which means the cash balance on hand and at the bank, and Flow, which refers to the movement of cash into and out of the organization. It covers all items involving actual cash transactions. Hence, it indicates the changes in cash status of the company, be it related to receipts, payments, or disbursements.
What is Cash Flow Statement?
“A Cash Flow Statement is the statement containing cash inflows and outflows of an organization, during a particular period of time.”
For the preparation of Cash Flow Statement, financial statements of two different financial years are required. Hence, the Cash Flow Statement reports the Net Cash Flow.
Net Cash Flow represents the difference between the cash inflows and outflows generated from a company’s various activities. When there is an increase in cash, it indicates a cash inflow, whereas a decrease in cash signifies a cash outflow. The cash flow statement reconciles the opening and closing cash balances, showing how cash has moved during a specific period.
Cash has two main elements: cash and cash equivalents.
1. Cash includes money kept on hand and demand deposits in the bank.
2. Cash equivalents are short-term, highly liquid investments that can be quickly converted into cash. Examples include treasury bills, commercial papers, commercial bills, certificates of deposit, and call money.
Now, let’s move on to the classification of cash flow activities!
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Classification of Cash Flow Activities
Cash flow activities can be divided into three categories:
- Operating activities
- Investing activities
- Financing activities
Investing activities include the purchase and sale of long-term assets and other investments that are not part of cash equivalents. These activities show how much the company has spent on resources that are expected to generate income and cash flow in the future.
Next, Financing activities are those that affect the owner’s capital and the company’s borrowings. These activities show how the claims of shareholders and lenders on the company’s future cash flows are changing.
Lastly, Operating activities are the primary activities through which a company earns its revenue. They show how much cash the company’s regular business operations have generated to maintain efficiency, pay dividends, repay loans, and invest in assets.
Calculation of Cash from Operating Activities
There are two methods to calculate cash from operating activities:
1. Direct Method:
This method considers gross cash receipts and gross cash payments directly from the accounting records to determine cash from operations.
2. Indirect Method:
This method starts with net profit or loss from the profit and loss account and then makes necessary adjustments to arrive at cash generated from operating activities.
To move to the next section, i.e, the fund flow statement, you need to know-
What are funds?
The term fund refers to the total money available for running the company’s regular operations and for acquiring business assets.
What is fund flow?
The term fund flow refers to the changes in a company’s working capital during business operations. Simply put, it shows how economic resources move from one asset or liability to another.
What is Fund Flow Statement?
“Fund flow statement refers to the statement from which business gets funds and the uses of funds, between two balance sheet dates.”
The fund flow statement is prepared to assess changes in a company’s financial position between two balance sheet dates. It shows how financial resources move into and out of the business during a specific period. It also shows sources and uses of funds. To create a fund flow statement, basic financial statements such as the balance sheet and income statement are used.
Moreover, there are two things we need to calculate first before the preparation of fund flow statement. These include changes in working capital and funds from operations. Whether a financial event is included in the fund flow statement depends on the flow of funds.
Now, let’s move on to the difference between cash flow statement and fund flow statement.
Difference Between Cash Flow and Fund Flow Statement
1 Definition:
A cash flow statement summarizes the cash receipts and payments of a company between two financial periods. In contrast, a fund flow statement is used to analyze changes in the company’s financial position by comparing two financial years.
2 Based On:
While the cash flow statement uses a cash basis of accounting, conversely, the fund flow statement uses an accrual basis of accounting.
3 Discloses:
A cash flow statement is a statement prepared using historical data, which discloses the flow of cash in and out of the firm. On the other hand, a fund flow statement is a statement that represents the analytical details relating to the various sources of funds and their application in an accounting cycle.
4 Purpose of Preparation:
For short-term financial planning and decision-making, a cash flow statement is prepared. Whereas a fund flow statement is suitable for long-term financial planning and decision-making.
5 Usage:
A cash flow statement shows how cash has moved between any two fiscal years or quarters. In contrast, a fund flow statement explains the reasons behind changes in balance sheet items, such as assets and liabilities, between two financial years.
Note:
Cash flow statements can also be prepared for shorter periods, such as months.
6 Opening Balance:
A cash flow statement starts with the opening cash balance of the company and shows how cash has moved into and out of the business during a specific period. In contrast, a fund flow statement begins with the opening working capital and provides an analysis of the sources and uses of funds throughout the accounting period. Now let’s move on to the Cash flow and fund flow statement format.
| Cash Flow Statement (Indirect Method) |
| Particulars |
₹ |
| I. Cash from Operating Activities: |
| A. Net Profit before taxation and extraordinary item |
xxxx |
| Adjustment for Non-cash and Non-Operating Item |
| B. Add: Non-Cash Expenses: |
| Depreciation |
xxxx |
| Interest on Debentures and Loans |
xxxx |
| Preliminary Expenses or Underwriting Commission or Discount on issue of debentures or Shares written off |
xxxx |
| Goodwill/Trademark/Patent/Copyright amortized |
xxxx |
| Loss on Sale of Investment |
xxxx |
| Premium Payable on redemption of preference shares or debentures |
xxxx |
| C. Less: Non-Cash Incomes: |
| Profit on Sale of Investment |
(xxxx) |
| Income from investment |
(xxxx) |
| Total Adjustments |
xxxx |
| D. Operating Profit before Working Capital changes (A+B−C) |
xxxx |
| E. Add: Decrease in Current Assets and Increase in Current Liabilities: |
| Decrease in Inventories |
xxxx |
| Decrease in Trade Receivables |
xxxx |
| Decrease in Prepaid Expenses |
xxxx |
| Decrease in Accrued Commission |
xxxx |
| Increase in Trade Payables |
xxxx |
| Increase in Outstanding Expenses |
xxxx |
| Increase in Commission received in advance |
xxxx |
| Increase in Provision for Doubtful Debts or Discount on Debtors |
xxxx |
| Total E |
xxxx |
| F. Less: Increase in Current Assets and Decrease in Current Liabilities: |
| Increase in Inventories |
(xxxx) |
| Increase in Trade Receivables |
(xxxx) |
| Increase in Prepaid Expenses |
(xxxx) |
| Increase in Accrued Commission |
(xxxx) |
| Decrease in Trade Payables |
(xxxx) |
| Decrease in Outstanding Expenses |
(xxxx) |
| Decrease in Commission received in advance |
(xxxx) |
| Decrease in Provision for Doubtful Debts/Discount on Debtors |
(xxxx) |
| Total F |
xxxx |
| G. Net Cash Flow from Operating Activities before Tax (D+E−F) |
xxxx |
| H. Less: Income Taxes Paid (Less of Refund) |
(xxxx) |
| I. Net Cash flow from Operating Activities Before Extraordinary Item |
xxxx |
| J. Extraordinary Item (Add/Less) |
xxxx |
| Total J |
xxxx |
| I. Net Cash flow from (used in) Operating Activities |
xxxx |
| II. Cash Flow From Investing Activities: |
| Add: |
| Sale of Machinery/Land & Building for Cash |
xxxx |
| Sale of Investments for Cash |
xxxx |
| Sale of Patents/Trademarks/Copyrights for Cash |
xxxx |
| Income received from Investments |
xxxx |
| Less: |
| Purchase of Machinery/Land & Building for Cash |
(xxxx) |
| Purchase of Investments for Cash |
(xxxx) |
| Purchase of Patents/Trademarks/Copyrights/Goodwill for Cash |
(xxxx) |
| Net Investing Activities |
xxxx |
| II. Net Cash flow from (used in) Investing Activities |
xxxx |
| III. Cash Flow from Financing Activities: |
| Add: |
| Proceeds from Issue of Share Capital for Cash |
xxxx |
| Proceeds from Issue of Debentures for Cash |
xxxx |
| Proceeds from Loan Raised |
xxxx |
| Less: |
| Redemption of Preference Shares / Buy-back of Equity Shares |
(xxxx) |
| Redemption of Debentures for Cash |
(xxxx) |
| Loans Repaid |
(xxxx) |
| Interest Paid on Debentures/Loans |
(xxxx) |
| Interim Dividend Paid |
(xxxx) |
| Final Dividend Paid |
(xxxx) |
| Net Financing Activities |
xxxx |
| III. Net Cash Flow from (used in) Financing Activities |
xxxx |
| IV. Net Increase (Decrease) in Cash and Cash Equivalents (I+II+III) |
xxxx |
| Add: Cash and Cash Equivalents at the Beginning of the Period |
|
| Cash in Hand |
xxxx |
| Cash at Bank |
xxxx |
| Cash Equivalents |
xxxx |
| Total Opening Balance |
xxxx |
| Less: Cash and Cash Equivalents at the End of the Period |
|
| Cash in Hand |
(xxxx) |
| Cash at Bank |
(xxxx) |
| Cash Equivalents |
(xxxx) |
| Total Closing Balance |
(xxxx) |
| Cash Flow Statement (Direct Method) |
| Particulars |
₹ |
| I. Cash from Operating Activities: |
| A. Operating cash receipts: |
| Add: Cash sales |
xxxx |
| Cash received from customers |
xxxx |
| Trading commission received |
xxxx |
| Royalties received |
xxxx |
| Total A |
xxxx |
| B. Operating cash payments: |
| Less: Cash purchase |
(xxxx) |
| Cash paid to the supplier |
(xxxx) |
| Cash paid for business expenses |
(xxxx) |
| Total B |
(xxxx) |
| C. Cash generated from operations (A – B) |
xxxx |
| Less: Income tax paid |
(xxxx) |
| Cash flow before extraordinary items |
xxxx |
| Adjusted extraordinary items (+/–) |
xxxx |
| Net cash flow from (or used in) operating activities |
xxxx |
Note: It is to be noted that the format of Cash from Investing Activities and Cash from Financing Activities will remain the same, as in the case of the indirect method.
There are two things we need to calculate prior preparation of a fund flow statement that includes the statement of changes in working capital and the statement of funds from operations.
| Particulars |
Previous Year |
Current Year |
Effect on Working Capital |
| Current Assets: |
| Cash in hand |
xxxx |
xxxx |
|
|
| Debtor |
xxxx |
xxxx |
|
|
| Inventory |
xxxx |
xxxx |
|
|
| Bills Receivable |
xxxx |
xxxx |
|
|
| Total Current Assets (A) |
xxxx |
xxxx |
|
|
| Current Liabilities: |
| Trade Creditors |
xxxx |
xxxx |
|
|
| Bills Payable |
xxxx |
xxxx |
|
|
| Total Current Liabilities (B) |
xxxx |
xxxx |
|
|
| Total Working Capital (A – B) |
xxxx |
xxxx |
|
|
| Change in Working Capital (+/–) |
xxxx |
xxxx |
xxxx |
xxxx |
| Total |
xxxx |
xxxx |
xxxx |
xxxx |
Statement of Funds from Operations:
| Particulars |
Amount |
| A. Net Profit After Tax for the year |
xxxx |
| B. Add: Non-Operating Expenses: |
|
| Depreciation |
xxxx |
| Loss on Sale of Fixed Assets |
xxxx |
| Interest on Debentures |
xxxx |
| Goodwill Written off |
xxxx |
| Provision for Tax |
xxxx |
| Proposed Dividend |
xxxx |
| Interim Dividend |
xxxx |
| Transfer from Profit and Loss Account |
xxxx |
| Total (B) |
xxxx |
| C. Less: Non-Operating Incomes: |
|
| Interest on Investment |
(xxxx) |
| Dividend Received |
(xxxx) |
| Profit on Sale of Fixed Assets |
(xxxx) |
| Interest on Bank Deposit |
(xxxx) |
| Refund of Tax |
(xxxx) |
| Total (C) |
(xxxx) |
| D. Total (A + B – C) |
xxxx |
| E. Less: Net Profit After Tax (Previous Year) |
(xxxx) |
| Funds from Operations (D – E) |
xxxx |
| Particulars |
Amount (in ₹) |
Particulars |
Amount (in ₹) |
| Sources of Funds: |
Application of Funds: |
| Funds from Operations |
xxxx |
Loan from Operations |
xxxx |
| Sale of Fixed Assets |
xxxx |
Payment of Dividend |
xxxx |
| Sale of Investment |
xxxx |
Payment of Taxes |
xxxx |
| Issue of Shares |
xxxx |
Purchase of Fixed Assets |
xxxx |
| Issue of Debentures |
xxxx |
Repayment of Loans |
xxxx |
| Long term Borrowings |
xxxx |
Redemption of Debentures |
xxxx |
| Decrease in Working Capital |
xxxx |
Redemption of Preference Shares |
xxxx |
|
|
Increase in Working Capital |
xxxx |
| Total |
xxxx |
Total |
xxxx |
Conclusion
We hope the difference between cash flow statement and fund flow statement is clear to you now. While a cash flow statement helps track the actual movement of cash in and out of a business during a period, a fund flow statement explains the reasons behind changes in the company’s financial position by analyzing sources and uses of funds.
Both statements are important tools for understanding a company’s financial health, helping investors, management, and creditors make informed decisions. Knowing how to read and use these statements can give you a better picture of a company’s liquidity, operational efficiency, and long-term financial stability. However, if you want to study the topic further in detail, you can read our other finance blogs.
Cash Flow Vs Fund Flow Statement – FAQs
1. What is the difference between cashflow and cash flow statement?
Cash flow refers to the movement of money in and out of a business, showing how cash is generated and spent over a period. Net cash flow is calculated by subtracting total cash outflows from total cash inflows. On the other hand, a cash flow statement is a formal financial report that details a company’s cash inflows and outflows, helping stakeholders understand where the money comes from and how it is used during a specific period.
2. Which is more useful, cash flow or fund flow?
Both cash flow and fund flow statements are important, but they serve different purposes.
A fund flow statement is mainly used to analyze long-term financial changes, showing how a company’s financing, operations, and investment decisions affect its working capital and overall financial position over time. It is more of a planning and strategic tool.
On the other hand, a cash flow statement focuses on the actual inflow and outflow of cash during a period, making it a tactical tool for day-to-day financial management and short-term decision-making.
3. How to prepare a fund flow statement?
Here are the steps to prepare a fund flow statement:
Step 1: Collect the necessary financial data from the company’s balance sheet and income statement.
Step 2: Identify the changes in working capital between the two balance sheet dates.
Step 3: Classify the sources and uses of funds.
Step 4: Calculate the net changes in working capital.
Step 5: Determine the long-term sources and uses of funds.
Step 6: Take into account any additional income or adjustments as required.
4. How to Prepare a Cash Flow Statement?
Here are the steps to prepare a cash flow statement:
Step 1: Collect financial data by gathering balance sheets and income statements for two periods
Step 2: Classify cash flows into operating, investing, and financing activities
Step 3: Calculate cash from operations using the direct or indirect method
Step 4: Include investing and financing cash flows, such as cash spent or received from assets, loans, and equity
Step 5: Determine net cash flow by adding cash flows from all activities
Step 6: Reconcile cash balance by adding opening cash to net cash flow to get the closing balance
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.