SNAPSHOT FOR PREPARATION OF FUND FLOW STATEMENT
Fund Flow Statement is not an integral part of financial statements. The
lenders will have to prepare this statement on their own. The Fund flow Statement
is prepared to check the movement of long term funds between two Balance Sheet
dates and the availability of Long Term Surplus / Deficit, which must be equal to
the difference in Net Working Capital (NWC) during two Balance Sheet dates.
Liabilities are the sources for the business and assets represent the uses of funds
for the business. The funds raised on short term basis i.e. current liabilities are of
short term nature whereas the funds raised on long terms basis i.e. term liabilities
and net worth are of long term nature. Similarly, the funds deployed in the current
assets are considered as short term uses of funds and the funds deployed in fixed
assets, non-current assets and intangibles are considered as long term uses.
While preparing the fund flow statement, the movement of long term sources and
uses is to be calculated i.e. how much net long term funds are generated of
deployed in the business during the year. The very purpose of this exercise is to
know that whether the unit is able to generate sufficient long term funds to meet
out its long term requirement or not. If not then from where the funds have been
arranged to meet out its long term requirement.
The Long Term Sources can be calculated by summing the increases in term
liabilities and net worth i.e. other than current liabilities or decreases in fixed
assets, non-current assets and intangibles i.e. other than current assets. Similarly,
the Long Term Usage can be calculated by summing the decreasesin term liabilities
and net worth i.e. other than current liabilities or increases in fixed assets, noncurrent
assets and intangibles i.e. other than current assets. If the Long Term
Sources is more than the Long Term uses, there will be Long Term Surplus and if
the Long Term Sources is Less than the Long Term uses, there will be Long Term
Deficit.
Net working Capital (NWC) means the difference between current assets and
current liabilities, in other words, the long term funds available to support short
term uses. More the long term funds available to support short term uses, more
the unit will be comfortable in honoring its short term sources. As we have already
discussed that the current liabilities are the short term sources and current assets
are the short term uses, hence the difference between Long Term Sources and
Long Term Uses must be equal to difference between short term sources and short
term uses. Since the fund flow statement is prepared for the movement of figures
between two balance sheet dates, hence only the difference between two balance
sheet date figures should be taken into consideration while preparing fund flow
statement.
The Fund Flow Statement is prepared by using the following steps,
i. Capture all the long term sources from the Operating Statement e.g. Profit
After Tax, Depreciation, Amortizations, Non-Cash Charges etc.
ii. Capture all the long term uses from the Operating Statement e.g. Net Loss,
dividend payments, withdrawals etc.
iii. Capture all the long term sources / uses from the Balance Sheet
a. All the liabilities are sources of fund for the business. There are two
types of liabilities i.e. Current and Non-current. Current liabilities are
short term sources of fund whereas non-current liabilities are long term
sources of fund. Any increase in non-current liabilities (Term Liabilities &
Net Worth) will be the long term source and any decrease in non-current
liabilities will be the long term uses.
b. Similarly, all the assets are uses of funds in the business. There are two
types of assets i.e. Current and Non-current. Current assets are short
term uses of fund whereas non-current assets are long term uses of fund.
Any increase in Fixed Assets (change in gross block is to be considered as
we have already taken the depreciation as long term source from the
operating statement), non-current assets and Intangibles) will be the long
term uses and any decrease in non-current assets will be the long term
sources.
c. While considering the movement in Intangible Assets, it is to be kept in
mind that any reduction on account of amortization is not to be
considered as the same has already been considered from the operating
statement. Hence, movement on account of acquisition / disposal of
intangibles will be considered as long term source / uses.
iv. Now calculate the total long term sources and uses and find out the
difference. If the long term sources are more than long term uses, it will
result in long term surplus and vice versa.
It is expected that the long term funds generated should be sufficient to meet out
the long term requirements of the unit. Apart from meeting the requirement of
long term nature, there should be sufficient long term surplus left to meet out the
net working capital requirement.
Sometimes, it is found in the analysis of fund flow statement that there is long
term deficit. Long term deficit should not be treated as a negative sign always
rather the reasons for deficit are to be analysed critically. The deficit can be
acceptable if the short term funds (surplus liquidity) have been utilized for long
term purposes to meet out the genuine business requirement and the resultant
liquidity of the unit does not suffer adversely, meaning thereof, the current ratio
and the position of absolute net working capital should be in comfortable and
acceptable zone. Normally, it happens with the units, having conservative
approach and do not want to be over leveraged. These units first accumulate the
funds and keep them in the liquid form and whenever the requirement arises, they
use the funds as per the needs of the business. If, the long term deficit is found in
any unit, the reasons for the same are to be analysed in details as this may create
liquidity crunch in the unit. The reasons for long term deficit or reduction in the
Net Working Capital could be as follows,
Losses: Leading to reduction in reserves, which is forming part of Net
Worth, resulting decline in generation of long term funds resulting
decline in NWC.
Conversion: Some of the Current Asset becoming Non-Current (Book
Debts stretched, stocks become obsolete, etc.), resulting increase in
non-current assets i.e. long term uses.
Diversion: Short term funds are used for long term purposes but the
funds remains within the business, resulting decline in the gap between
current assets i.e. short term uses and current liabilities i.e. short term
sources.
Siphoning-off: The funds are used for unrelated activities in other words
the funds taken out from the business, resulting decline in the long term
sources.
In all the above scenarios, the Siphoning off of funds is to be considered as most
dangerous sign because it is very difficult to bring back the funds in the system,
which has already been taken out from the business. In all other scenarios, position
can be improved over time by taking corrective steps.
