Difference Between Fund Flow And Cash Flow

Fund Flow and Cash Flow are two concepts fundamental to financial accounting. They are vital indicators of a company’s financial health. Cash flow records a company’s total inflow and outflow of actual cash. Fund flow records the movement of cash in and out of a company.

Investors and other stakeholders analyze these statements to make strategic decisions and for long-term financial planning.

In this article, we will delve into the key differences between fund flow and cash flow and how they are used to make critical decisions.

What is Fund Flow?

Fund flow is the inflow and outflow of funds or assets in a company over a specific accounting period. Often measured monthly or quarterly, fund flow statements summarise the source and applications of funds in the period. For this, the balance sheets of two accounting periods are compared for value against specific working capital entries.

Fund flow records only the movement of cash and not the performance of the asset. It can be used to identify any irregular financial activity, such as an expense. Some important sources of funds for a business are

Fund flow from operating activities

Fund flow can be generated from day-to-day operations of a business, including-

• Sales revenue,
• Service fees,
• Rental income,
• Any other income generated by the entity’s essential activities.

For example, a retail store generates fund flow through the sales of its products, while a software company may generate funds from licensing fees or subscription revenue.

Fund flow from investments

Income generated from investments can be a significant source of fund flow. This includes

• Dividends received from stocks,
• Interest earned from bonds or savings accounts,
• Rental income from real estate properties.

An individual or a company with an investment portfolio generates funds through these sources. For example, a retiree may rely on dividends from stocks and interest from bonds as a source of regular income

Advantages & Disadvantages of Fund Flow

Advantages

1) Provides a comprehensive financial view.
2) Helps in long-term financial planning.
3) Efficient capital allocation decisions.

Disadvantages

1) Can be complex to understand and analyze.
2) Not always required by regulations.
3) Limited insights into short-term liquidity.

Also Read: How To Start Investing In Mutual Funds: Investment Guide for Beginners

What is Cash Flow?

Cash flow is the inflow and outflow of cash or cash equivalents in a company. The flow of cash into the firm is called cash inflow or positive cash flow. In contrast, the outward flow of cash is called cash outflow or negative cash flow.

The term refers to the generation and usage of cash in a particular accounting period. It depicts the increase or decrease in the cash a company or a business has.

There are many sources of cash flow in a company. They are listed below:

Cash from operating activities

It reflects the cash that is generated and spent on products/services. Operating activities are the primary source of revenue generation. It might include:

• Cash receipts for Sales of goods and services
• Cash receipts from fees, royalties, commissions, etc.
• Cash payment for Interests
• Income tax payments
• Cash payment to suppliers
• Payment of salaries, wages, and rent
• Other operating expenses

Cash from investment activities

It reflects the cash generated and spent on acquiring and disposing of equipment, assets, or investments. It includes:

• Purchase/sale of assets
• A loan made to vendors
• Loan received from customers
• Payments related to mergers and acquisitions

Cash from financing activities

It represents the change in cash due to selling or paying off financial instruments. This is important because it results in changes in the capital and borrowings of a company. It includes:

• Issuing a bond to the public
• Paying interest to bondholders
• Issuing shares and debentures
• Repaying debt

Here is a detailed account of the cash flow statement as per the accounting standards.

Advantages & Disadvantages of Cash Flow

Advantages

1) Offers immediate insights into liquidity.
2) Assesses operational efficiency.
3) Ensures regulatory compliance.

Disadvantages

1) Limited focus on long-term financial health.
2) Vulnerable to manipulation in cash reporting.
3) Relies on accounting for accuracy.

Key Difference Between Fund Flow and Cash Flow

Cash flow analysis is used to determine liquidity whereas fund flow analysis draws out the efficiency of working capital usage. The table given below helps us compare fund flow vs. cash flow

	Cash Flow	Fund Flow
Definition	Cash receipts and cash payments of a company during a specific period	Source and usage of funds by comparing the balance sheets of two financial years
Concept	Deals with changes in cash position	Deals with changes in the working capital position
Type of Accounting	Cash basis of accounting	Accrual basis of accounting
Applications	Long-term financial analysis capital; budgetingFinding out the financial position of a company	Long-term financial analysisCapital; budgetingFinding out the financial position of a company
Required by the Companies Act and SEBI’s regulations	Yes	No

Utility

• Cash Flow: Cash flow analysis is highly useful in managing your day-to-day operations and ensuring you have enough cash to cover immediate expenses. It helps you monitor your cash inflows and outflows, aiding in budgeting, cash management, and short-term decision-making.
• Fund Flow: Fund flow analysis provides a broader perspective on your financial position and helps you understand the movement of funds within your company. It assists in assessing long-term financial activities, such as capital investments, debt repayments, and equity changes. It aids in strategic planning and evaluating the overall financial health of your business.

Analysis of Business Position

• Cash Flow: Cash flow analysis focuses on your liquidity and cash management. It enables you to assess your ability to meet short-term financial obligations, manage working capital, and identify cash flow patterns. It provides insights into the cash-generating capabilities of your operations.
• Fund Flow: Fund flow analysis emphasizes changes in your financial position over time. It helps you understand the allocation and utilization of funds, evaluate your long-term financial decisions, and assess the impact of investments, debt, and equity changes on your business’s overall financial position.

Disclosures Made

• Cash Flow: Cash flow information is typically disclosed in the cash flow statement, which is a standard financial statement required in most financial reporting frameworks. It provides transparency regarding the sources and uses of cash in your business activities.
• Fund Flow: Fund flow analysis does not have a dedicated financial statement. However, it involves analyzing changes in balance sheet items, which are disclosed in the balance sheet, income statement, and statement of changes in equity. Fund flow analysis provides insights into the movement of funds between these financial statements.

Inclusion in Annual Financial Statement

• Cash Flow: The cash flow statement is a required part of the annual financial statements for most companies. It provides a comprehensive view of cash flows from operating, investing, and financing activities over a specific period.
• Fund Flow: Fund flow analysis is not a mandatory part of the annual financial statements. However, the changes in balance sheet items and additional information related to funds can be analyzed and disclosed in the notes to the financial statements.

Accounting Basis

• Cash Flow: Derived from the actual cash transactions recorded in the cash book or financial statements.
• Fund Flow: Derived from changes in various balance sheet items, such as assets, liabilities, and equity.

Also Read: Importance of Financial Planning for Small Businesses

Concluding: Fund Flow vs. Cash Flow

Cash flow and fund flow are pivotal concepts in financial accounting. Both statements are important metrics that provide insight into the financial position of the firm. A cash flow statement is essential to determine a firm’s short-term liquidity.

In contrast, a fund flow statement showcases the efficiency of a firm in utilizing its working capital. We must know what distinguishes cash flow statements and fund flow statements from each other.

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Frequently Asked Questions (FAQ’s)

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