HOW TO PREPARE FUNDS FLOW AND CASH FLOW

ANALYSIS

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
www.afterschoool.tk
mobile : 91+9414430763

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 WHAT IS A FUND?

WORKING CAPITAL
(DIFFERENCE BETWEEN CURRENT
ASSETS AND CURRENT LIABILITIES IS
CALLED NET WORKING CAPITAL)

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 WHEN DO WE HAVE FLOW
OF FUNDS?

When working capital increases or decreases, it

is called flow of funds.

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 Examples of funds flow
All those transactions, when either working
capital increases or decreases – examples :
increase in capital (with increase in capital,
cash will increase, so flow of funds)
purchase of furniture (when you purchase, cash
will reduce, so flow of funds take place)
payment of long term loans (cash will decrease
so flow of funds)
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When we dont have funds flow??

When both the aspects of transations are

related either to long term sources or to short
term sources, there is no flow of funds.
Example : issue of equity against fixed assets
like building – there is no impact on working
capital, so there is no funds flow

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 Rule of funds flow :

Out of the two aspects of a transactions, one

should be related to short term and the second
should be related to long term, then only funds
flow is possible.

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 Statements to be prepared ...
Funds flow statement (FFS) – which shows all
the transactions involving flow of funds
statement of changes in working capital
(SCWC) – all the transactions, which depict
increase or decrease in working capital
funds from operations (FFO) - adjusted profit
and loss account, which removes all those
transactions, which dont have any impact on
funds
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 FUNDS FLOW STATEMENT
Only those transactions, which are related to
long term resources or long term applications –
they do affect working capital, so they will
come. We will not take short term resources or
short term applications here. However, the
other aspect of all these transactions is related
to working capital.
Example : purchase of building (for long term)
against cash (from short term)
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 SCWC

Statement of changes in working capital will

show only items of working capital – like
debtors, cash, inventory, BR, BP, short term
liability, creditors, overdraft etc. They will be
compared over the period (one year generally)
and we will show whether they increased or
decreased during the period.
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 FFO

Profit from P&L account contains many items

which dont affect flow of funds. These items
will be adjusted in FFO. For example,
depreciation doesnt involve any outflow of
money or working capital, so depreciation has
to be added back to profit (as it was deducted
earlier in Profit in P& L account)
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 Examples of transactions
Purchase of machine = FFS
issue of equity = FFS
increase in debtors = SCWC
decrease in stock = SCWC (decrease in stock results in
decrease in working capital, so it will come in SCWC)
depreciation = FFO (there is no flow of funds in
depreciation, so it will be added back to profit)

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WHAT IS CAPITAL RECEIPT?

Receipt which are of the nature of fixed capital

are called capital receipt. In all these cases,
there is also increase in money / bank balance,
so this item will come in funds flow statement.
Example : issue of equity / debenture / bonds

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WHAT IS REVENUE RECEIPT?
Receipts which are of the nature of circulating capital
are called capital receipt
Circulating capital is that part of the capital which is
turned over in the business and which ultimately
results in profit or loss.
These transactions will not be recorded in FFS. The
net difference of these will appear in SCWC (where
we look at difference of bank balance over the
period).
Example : sales (it is not recorded in FFS,FFO etc.)
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 Machinery in the hands of a
manufacturer is ....

Fixed capital - therefore purchase / sale of

machinary against bank / cash will come in
FFS. However, purchase / sale against equity /
debenture / bond will not come in any
statement.

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