July 15, 2025
4 mins read
Think of a Funds Flow Statement as a “before and after” picture of a company’s money situation — but not just cash. It focuses on working capital, which is the difference between a company’s short-term assets (like cash, inventory, and money owed by customers) and its short-term debts (like bills to pay and loans due soon).
It answers two simple questions: Where did the money come from? And where did it go? Comparing two balance sheets shows how the company’s resources moved over a certain period.
A Funds Flow Statement works like a map, showing the movement of money within a business. It highlights which activities generated funds and which ones consumed them, helping you track the financial health of the company. Unlike the Cash Flow Statement, which records only cash inflows and outflows, the Funds Flow Statement provides a more comprehensive picture.
It considers not just cash but also other changes in working capital, such as receivables, payables, and inventories. By doing so, it reflects the broader financial position of a company in the short term. This makes it a valuable tool for understanding how resources are being allocated, whether operations are efficiently funded, and how financial strategies affect liquidity, solvency, and the overall stability of the business.
For analysts, this report is like reading the “strategy” behind the numbers. It shows patterns you might not spot in the income statement or balance sheet alone.
As an example, it can show if a business is using dangerous long-term loans to pay for day-to-day costs. It can also show if the company is spending too much of its short-term resources on things like buildings or tools, leaving less for day-to-day tasks.
It's an easy way to tell if the business is smartly handling its money and making smart investments.
The statement is split into two main parts: sources of funds (money coming in) and applications of funds (money going out).
Sources of Funds:
Funds from operations: Profit from normal business activities after adjusting for non-cash expenses like depreciation and excluding unusual gains or losses.
Sale of fixed assets: Money earned from selling things like land, buildings, or machinery.
Issue of shares or debentures: Raising money by selling shares or issuing long-term debt.
Long-term loans: Borrowing money from banks or other lenders for many years.
Non-operating income: Extra earnings from outside the main business, such as interest or dividends.
Decrease in working capital: When short-term debts go up or short-term assets go down, freeing up money.
It’s usually done in three steps:
Compare current assets and liabilities from two balance sheets. If assets go up, that’s a use of funds. If liabilities go up, that’s a source of funds.
Start with the net profit. Add back non-cash costs like depreciation. Remove extra income that’s not part of the normal business.
List all inflows under “sources” and all outflows under “applications”. The totals must match, with any difference explained by the change in working capital.
Let’s say a company sells old equipment, issues new shares, and makes a profit from operations. These are all sources of funds.
Now suppose it also buys new machinery, repays a long-term loan, and pays dividends. These are applications of funds.
The Funds Flow Statement would clearly show these movements and how they affected the company’s working capital over the year.
Funds Flow Statement relies on historical data, limiting its use for forecasting or predicting future financial conditions. It shows past movements of funds but cannot guide decision-makers about upcoming challenges.
Non-fund transactions such as depreciation, amortization, or revaluation are ignored, even though they significantly impact financial health. This omission reduces the completeness and accuracy of financial analysis.
Compared to a cash flow statement, funds flow provides limited insights into liquidity. It focuses mainly on working capital changes, neglecting actual cash inflows and outflows that influence day-to-day financial decisions.
It fails to capture market value fluctuations of assets and liabilities, relying only on book values. This limits its effectiveness in assessing the true financial strength of a business.
Preparation of a funds flow statement is complex, requiring detailed analysis of balance sheets and supporting schedules. For many users, this complexity reduces practicality and accessibility for quick financial review.
The Funds Flow Statement is a great way to see how the short-term finances of a business change over time. You can find out where the money came from, how it was spent, and what that means for how the business works.
For a full picture, look at it with other bank statements. This report won't tell you everything, but it will give you a good idea of the business's financial decisions and goals.
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The purpose of a Funds Flow Statement is to explain how a company's working capital has changed over a period by identifying the sources from which funds were generated and how those funds were utilised for various activities like investments, operations, and financing.
A Funds Flow Statement focuses on changes in working capital (current assets minus current liabilities), while a Cash Flow Statement specifically tracks the movements of actual cash and cash equivalents, categorising them into operating, investing, and financing activities.
The main components of a Funds Flow Statement are "Sources of Funds" (e.g., funds from operations, sale of fixed assets, issue of shares) and "Applications of Funds" (e.g., purchase of fixed assets, repayment of loans, payment of dividends).
Working capital is important because the Funds Flow Statement primarily analyses its changes. It indicates how a company's short-term resources are being managed and deployed, reflecting shifts in its liquidity position between two balance sheet dates.
While the concept of tracking sources and uses of funds can be applied, a formal Funds Flow Statement as used in corporate finance is generally not used for personal finance. Personal budgeting and cash flow analysis tools are more commonly used for individual financial management.
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