Difference Between Cash Flow Statement and Fund Flow Statement

Understanding the difference between a Cash Flow Statement and a Fund Flow Statement is essential. Both statements follow the flow of money but to different ends. A Cash Flow Statement is concerned with the cash inflows and outflows over a given time period and aids in measuring liquidity and short-term financial health. On the other hand, a Fund Flow Statement analyzes financial position changes by reviewing how money is raised and spent between two balance sheet dates. These statements paint an overall picture of a company's financial activities and help support more informed decision-making and financial planning.

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Tabular Comparison - Cash Flow Statement vs Fund Flow Statement 

What is a Cash Flow Statement?

The cash flow statement is a basic financial statement that reports on the variations and movements of cash and its equivalents in a given period. It shows the cash that has been generated and used in the operating, investing and financing activities of the company.

To guarantee the proper functioning of a company, it is essential to maintain an optimal level of liquidity, take care of the cash flow issue and constantly analyse it to have the ability to cover its operations and face unforeseen events that can occur in business. Maintaining a healthy cash flow will allow you to make forecasts to avoid emergency solutions, such as acquiring unplanned financing to resolve a pressing situation.

It is important to note that the cash flow statement is different from the income statement (also known as the profit and loss statement) and the balance sheet (also called the statement of financial position) because it does not include the amount of future incoming and outgoing cash that has been recorded in credit.

Objectives of the Cash Flow Statement

The main objectives of the cash flow statement are:

• Provide timely information to management for making decisions that help the company's operations.
• Provide information about the items and/or activities on which the available cash has been spent.
• Report past cash flows to generate forecasts.
• Determine the company's ability to meet its obligations with third parties and shareholders.
• Help make decisions about short-term investments when there is excess cash available.

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What is a Fund Flow Statement?

A fund flow statement, also known as a Statement of Changes in Financial Position or a Funds Statement, is a financial statement summarising a company's or organisation's changes in financial resources over a specific period. 

It helps business stakeholders, such as investors, creditors, and management, understand how funds have been generated and utilised during that period. The primary objectives and importance of a Fund Flow Statement include:

Objectives of Fund Flow Statements

1. Analyse the sources and uses of funds within an organisation. It provides insights into how cash and other financial resources have moved through the business.
2. Track changes in working capital, fixed assets, long-term debt, equity, and other financial components to identify trends and patterns.
3. Assess the financial health and liquidity of a company by showing whether it is generating enough funds internally to meet its operational and investment needs.
4. Assist in making informed financial decisions, such as dividend distributions, debt repayments, and capital investments, based on the availability of funds.
5. Allow stakeholders to identify areas of financial strength or weakness and take appropriate actions to address them.

Importance of Fund Flow Statements

1. The Fund Flow Statement aids in financial planning by providing a historical perspective on how funds have been managed and helps to set realistic financial goals.
2. Investors and creditors use the Fund Flow Statement to evaluate a company's financial performance and ability to generate cash flows.
3. It allows management to monitor the composition of the company's capital structure, including changes in equity, long-term debt, and working capital.
4. Fund flow statements may be used as a part of a company's financial reporting obligations.
5. They make a valuable tool for making strategic decisions, such as expanding operations, acquiring other businesses, or restructuring the company's financial resources.

Conclusion

The cash flow statement is more comprehensive and informative than the fund flow statement, and investors and analysts more widely use it. However, the fund flow statement can still help understand a company's changes in working capital over time. Companies must prepare both the cash flow statement and fund flow statement to provide a complete picture of their financial performance and position to investors and other stakeholders.