Fund Flow Analysis | Importance of Fund Flow Analysis

          In our earlier article we have understood Fund Flow Statement. Today in this article let us discuss about the fund flow analysis, Importance of fund flow analysis. Let us begin.

Fund Flow Analysis

          Fund here refers to as working capital. Fund Flow Analysis refers to the analysis of the funds moving from neither current asset to fixed assets or current assets to long term liabilities or vice verse. Fund flow in general terms can be said as inward and outward movement of the capital or cash in a given business during a specific period of time. Fund Flow Statement is prepared to understand the fund flow in business during a specific financial year. Fund Flow analysis is one of the important tools to understand the movement of fund and also sources of fund raised and application of the funds. Fund flow analysis is largely used by financial analyst, credit analyst and financial managers.

Importance of Fund Flow Analysis

          Fund flow analysis is helpful in following ways,

§  Analysis of Financial Position.

§  Helps to Understand the Fund Movement.

§  Answers Perplexing Questions.

§  Understand the Creditworthiness.

§  Allocation of Funds.

§  Sources & Application of Fund

Now let us try to understand each of the point below.

§  Analysis of Financial Position:

Fund flow analysis helps us to determine the reasons for the changes that takes place in assets and liabilities in the balance sheet, determines the problems rose during the financial year and also the movement of the fund within and out of the business to generate profit and loss. Thus fund flow analysis serves as a guide for the future by determining the financial position of business.  

§  Helps to understand the fund movement.

Fund Flow Statement consist of sources of fund and its application of the fund which means that it helps us to understand where the fund came from and how it was allocated and what was the ultimate result(profit or loss). Thus by having a better understanding of the fund movement leads to better management of funds to generate profit and maintain financial sound statements.

§  Answers Perplexing Questions.

As I mentioned in fund flow analysis meaning fund flow analysis analyzes the fund movement from current assets to fixed assets or current assets to long term liabilities or vice verse. With this information fund flow analysis determines

·        Why did current assets decreased?

·        What happened to current assets?

·        How fixed assets increased?

·        What happened to profit and where it went?

·        Sources of redemption of debt?

And other such kind of questions that get raised while analyzing financial statements.

§  Understand the creditworthiness.

Whenever an investor or bank lends or advances loans it helps them to determine how creditworthy the business is by analyzing the fund flow statement. And provides investors and bank the information about the how quickly the business will be able to pay its debts or it can’t pay.

§  Allocation of Funds:

Fund Flow Analysis helps to determine how the funds are being allocated which were raised by various modes of funds. Thus it serves as a guide for the future financial planning or allocation by providing data on allocation of fund and the problems raised during the specific financial year.

§  Sources & Application of Fund:

Fund Flow analysis helps us to determine the sources of fund i.e. inflow of cash or capital in a business and application of fund i.e. outflow of the fund from the business. By determining the sources and application it helps a financial manager in managing the proper debt equity ratio, financial soundness and serves as a guide for raising fund and application of fund in financial planning or forecasting.