Funds flow statement refers to that statement which shows the changes in working capital from one financial year to another financial year. In order to understand about funds flow statement let’s look at some of the features of funds flow statement –
- The first and foremost feature of funds flow statement is that it does not reveal the asset and liability position of the company rather it reveals the sources and uses of funds done by the company during a financial year. Hence looking at funds flow statement one cannot know the financial position of the company but he or she can know the working capital position of the company.
- There are many instances where the company is in profit still it is not able to pay dividends to shareholders and meet day to day operational expenses and that is where the funds flow come into play as it shows the reasons due to which liquidity position of the company is poor despite good profits.
- In the case of a company as far as short term financing and working capital are concerned it is the fund flow statement which is of more relevance in comparison to other financial statements like balance sheet or profit and loss account.
- It helps the management in understanding about the financial position of the company in more comprehensive way so if there is increase in cash in the balance sheet of the company then it is fund flow statement which will reveal whether that cash increase was due to non-business activity like sale of old asset or due to business activity like improvement in the sales of the company or reduction in operational expenses.
- It is not compulsory to prepare funds flow statement which is the case with other financial statements like balance sheet and profit and loss statement and furthermore it gathers most of the data from these statements only and not from any new source so in that sense it lacks originality.
- Since funds flow statement shows changes in financial position over a period of time it is more dynamic in nature in comparison to balance sheet which is static in nature as it shows the financial position of the company on a particular date.
- Another feature of fund flow statement is that is not used alone and is of no use to the management rather it is used together with other financial statements like balance sheet, profit and loss statement and cash flow statement in order to get the best possible analysis about the company.
As one can see from the above that fund flow statement has many unique characteristics and even though it is not compulsory to prepare companies all over the world prepare fund flow statement due to its usefulness and application.