Cash and funds have different business functions and help formulate financial strategies. The physical currency available with a business is known as cash. Whereas, the total financial resources available with a business are its funds. Cash flow and fund flow are essential statements to measure the financial health of a company. However, there is a vast difference between cash flow and fund flow. Both statements serve different purposes for adjudging the performance of a business. Before we explore the difference between fund flow and cash flow statement, let’s understand the purpose of each.
What is a Fund Flow?
Fund flow is the working capital of a business and includes the net movement of funds. The fund flow statement records any changes in the company’s net working capital during a given period. The statement can be used to determine the financial position of a company and assists in long-term financial planning. Any irregular financial activity or expense can be detected by studying the fund flow statement. Fund flow is useful to gauge investor sentiment although it is not as comprehensive as a cash flow statement.
What is a Cash Flow?
The cash flow statement is a key document to understand the movement of cash in an organization. It subsequently records the amount of money that has moved in and out of the organization’s accounts over time. The movement of cash may be due to operating, investing, or financing activities. Therefore, the statement is an analytical reconciliation of the opening cash balance and closing balance in a given period. It is among the four most important financial statements for investors. It shows them whether or not there are any potential liquidity problems with the company before investing.
What is the Difference Between Cash Flow Statement and Fund Flow Statement? Fund Flow vs Cash Flow
Cash flow statement vs fund flow statement: Cash flow statements are primarily for assessing a company’s short-term liquidity. While fund flow statements assess a company’s long-term financial stability and capital allocation.
Following are the key differences between cash flow statement and fund flow statement:
| Fund Flow | Cash Flow |
| Funds flow statements record the changes in working capital. | Cash flow statements record the movement of cash only. |
| It helps understand the financial position of the company. | It helps understand the net cash flow of the company. |
| The fund flow statement determines the source and application of funds. | The cash flow statement records changes in opening balance and closing balance of cash. |
| It works on the accrual basis of accounting. | It works on a cash basis of accounting. |
| The analysis is for the long term. | The analysis is for a short duration. |
| Fund flow is useful for capital budgeting. | Cash flow is useful for cash budgeting. |
Advantages of Cash Flow Statements
The following are the advantages of a cash flow statement:
- Liquidity Evaluation: Cash flow statements offer a transparent overview of an entity’s short-term liquidity, aiding businesses and investors in assessing their capacity to meet immediate financial obligations.
- Decision Making: These statements are invaluable for swift evaluations of a company’s cash position, facilitating short-term investment and operational decisions.
- Simplicity: Cash flow statements are relatively straightforward, making them easily understandable for both financial professionals and non-experts.
Disadvantages of Cash Flow Statements
The following are the disadvantages of a cash flow statement:
- Limited Focus: Cash flow statements primarily concentrate on short-term financial health, providing minimal insight into long-term financial stability or capital allocation.
- Doesn’t Include Non-Cash Items: Cash flow statements do not account for non-cash items like depreciation, potentially overlooking factors that can impact a company’s overall financial health.
- Cannot be Analyzed in Isolation: On its own, the cash flow statement holds little value. You must analyze other financial statements such as the balance sheet, profit and loss, etc., as well to understand the company’s financial position.
Advantages of Fund Flow Statements
The following are the advantages of a fund flow statement:
- Comprehensive Perspective: Fund flow statements provide a holistic view of an entity’s financial position, considering both cash and non-cash items, essential for assessing long-term financial stability.
- Strategic Planning: Valuable for long-term investment decisions and strategic planning, fund flow statements assist businesses in efficient fund allocation.
- Allocation of Funds: Fund flow statements enable the analysis of fund utilization within an organization, offering insights into capital allocation.
- Changes in Assets and Liabilities: The fund flow statement provides a detailed analysis of changes in liabilities and assets between two balance sheet dates, offering insights into the company’s financial status.
Disadvantages of Fund Flow Statements
The following are the disadvantages of a fund flow statement:
- Complex: Fund flow statements can be more intricate and time-consuming to prepare and analyze compared to cash flow statements.
- Doesn’t Reveal the Cash Position: The Fund Flow Statement does not provide insights into the company’s cash position. Consequently, the company must prepare a separate Cash Flow Statement in addition to the Fund Flow Statement.
- Not a Mandatory Statement: Unlike cash flow statements, fund flow statements may not be obligatory for all companies, potentially resulting in inconsistencies in reporting.
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