Fund Flow Analysis

1. FUNDS FLOW ANALYSIS
• Learning objectives:
• Concept of funds flow statement
• Preparation on total resource basis
• Preparation on cash basis
• FFS on working capital basis
• Significance of FFS and its interpretation.

2. Introduction and concept of FFS
Over a period of time, every item of B/S
undergoes change. While a business may
show considerable profits, there may not be
adequate cash to meet business needs.
Or, in spite of borrowings, funds may not be
available to support inventory. Statement
of changes in financial position (SCFP)
answers all these questions.

3. Funds Flow Statement
• Funds Flow Statement (FFS) is also known as:
• Cash flow statement (presentation is different)
• Statement of sources and uses / applications of
funds
• Statement of money provided and its disposition
• Summary of financial operations
• Financial expansion and replacement
• Statement of changes of financial position(SCFP)

4. FFS – the concept
• FFS captures movement of funds, whereas
B/S indicates static picture of sources and
uses of funds. FFS shows how did the
business meet its expenses, liabilities and
create assets during the year, how did it pay
taxes and dividends and the sources of those
funds. FFS is complementary to B/S, and
PL statement.

5. Preparation of FFS on total
resource basis
• Take difference of corresponding values in B/S of
2 years.
• Positive differences on assets side and negative
differences on liability side should be grouped.
• Negative differences on assets side and positive
differences on liability side should be grouped.
• When added up all items in each group, both totals
will tally, indicating arithmetical accuracy.
• Thus FFS is prepared and presented as required by
management.

6. FFS on cash basis
• Classify net B/S changes between 2 points
in time into changes that increase or
decrease cash.
• Classify from PL A/c. factors that increase
or decrease cash.
• Reclassify this information into a source of
funds and uses (or application) of funds.

7. Sources of funds that increase
cash
1. Net decrease in any asset other than cash
and fixed assets
2. Decrease in gross block or gross fixed
assets
3. Net increase in any liability
4. Proceeds from sale of any equity or pref.
shares
5. Funds from operations

8. Uses of funds that decrease cash
• Net increase in any asset other than cash
and fixed assets
• Gross increase in fixed assets
• Net decrease in any liability
• Retirement / redemption of shares or bonds
or purchase of shares
• Dividend pay out

9. FFS on working capital basis
• Increase in CA results in increase in WC
• Decrease in CA results in decrease in WC
• Increase in CL results in decrease in WC
• Decrease in CL results in increase in WC
• This statement is frequently used by bankers to
determine whether minimum WC requirement is
maintained by borrowers and to monitor
borrowers’ cash credit a/c. or WC loan A/c.

10. Significance of FFS
• Detection of imbalances in cash flows and
appropriate action
• Divisional performance appraisal
• Evaluation of firm’s financing
• Planning for future financing

11. Advantages-Funds Flow
Statement
• 1. It gives the figure of flow of funds from
operations. This is more relevant than the
net profit revealed by PL A/c. Depn and
amortization is charged at the discretion of
management and hence, profit, which is
after deducting above two charges, may not
be representative of cash generated. In
FFS, depn and non-cash charges are added
back.

12. Advantages - FFS
• 2. Comparison of the figures of working
capital budget with the figures of sources
and applications of funds in the FFS enables
management to ascertain how far the budget
has been implemented. It also helps in
preparation of budget for the subsequent
period.

13. Limitations of Funds Flow
Statement
• FFS shows flow of net working capital,
which includes Stock of goods, Prepaid
expenses, which do not contribute to the
short term ability of the enterprise to pay its
debts or liabilities. Because of these
limitations, AS 3 (Revised) has done away
with it and has recommended preparation of
Cash Flow Statement.

14. Distinction- FFS & CFS.
• 1. FFS deals with changes in working
capital position while CFS deals with
changes in cash position between two
points of time.
• 2. FFS does not contain opening and
closing balances of cash and cash
equivalents, but CFS gives both.

15. Distinction between FFS & CFS
• 3. FFS records sources of funds and
application of funds, resulting in increase in
working capital (WC) or decrease in WC.
In case of CFS, difference is reflected in
opening and closing cash and cash
equivalents. 4. Statement showing WC
changes is prepared along with FFS, but no
such statement is prepared in case of CFS.

16. Distinction between FFS & CFS
• 5. FFS can be prepared if CFS by indirect
method is made available. But one cannot
prepare CFS from FFS. For CFS, statement
showing changes in WC is required. To
prepare CFS by direct method, cash
received from Debtors and paid to Creditors
and to employees, etc. are required.

17. Distinction between FFS & CFS
• 6. FFS is relevant in estimating firm’s
ability to meet its long term liabilities. CFS
is more relevant in estimating firm’s
capacity to meet its liabilities over a short
term. 7. FFS is not required by Companies
Act or SEBI’s regulations. CFS must be
prepared and circulated to shareholders of
company, as per Co. Act and SEBI’ rules.

18. Distinction between FFS &
Income Statement or PL A/c.
• 1. FFS matches funds raised during a period
and funds applied or used. PL A/c. matches
income and expenditure over a period.
• 2. FFS tells increase or decrease in NWC
during a period , whereas PL A/c. reveals
net profit or loss during the period.
• 3. FFS deals with revenue and capital items,
whereas PL deals with only revenue items.

19. Distinction - FFS & PL A/c.
• 4. For preparing FFS, Income statement or
PL is required. Income statement can be
prepared without reference to FFS.
• 5. Preparation of FFS, though optional, is
advantageous. Income statement is must.
• 6. No prescribed format for FFS. But for
PLA/c. prescribed format must be followed
by banks, ins.co. and electricity companies.

20. Dist-Statement Showing Changes
in Working Capital & FFS
• 1. SSCWC notes the effect of changes in
each one of the current assets and current
liabilities on WC. FFS notes the effect of
items other than current assets and current
liabilities on WC.
• 2. Items appearing in SSCWC are
constituents of WC, but items appearing in
FFS are not constituents of WC.

21. Distinction - SSCWC and FFS
• 3. Only BS is required to prepare SSCWS,
whereas to prepare FFS, PLA/c. and BS are
required.
• 4. SSCWC is not presented in T form, but
FFS can be presented in T form.

22. Why FFS is important
• Remember these words:
• In business,
“CASH IS KING”
Cash Flow Statement will be taken up in
next session.

23. Assignment
• Prepare FFS or statement of sources and uses or
application of funds from the Balance Sheet and
Profit and Loss A/c. of any company. Comment
on your findings.
• Prepare cash flow statement showing:
Funds generated from operations,
Funds generated from investing activities, and
Funds generated from financing activities
Compare with cash flows of earlier year and
comment on observations.

24. Summary
• We have studied:
the concept of cash flow & funds flow
how to prepare and FFS?
what are the methods of presentation of FFS?
what is Cash Flow statement under Clause 32
of Listing Agreement with stock exchange?
what is the utility of FFS and interpretation?
what is the significance of FFS?

25. Case study – Reliance Industries
• Preparation and Study of
Funds Flow Statement of
Reliance Industries Limited
for the year 2007-08.
Source:
Annual Report of Reliance Industries Limited
for Financial Year 2007-08

26. Funds Flow Analysis
-Reliance Industries Limited
• Year ended 31st March, 2008
SOURCES OF FUNDS Rs. Crores
• Profit After Tax (PAT) 19506
• Add: Depreciation 4692
• Equity share warrants 1682
• Unsecured Loans 11623
• Increase in Current Liab.&Prov 5460
• Increase in Deferred Tax 890
• Total Sources 43853

27. Funds Flow Analysis-
Reliance Industries Ltd.:Uses
• Acquisition of Fixed Assets 20174
• Investments 5812
• Inventory 2111
• Sundry Debtors 2495
• Cash and Bank Balances 2445
(continued on next slide)

28. Funds Flow Analysis-
Reliance Industries Ltd.:Uses
• Loans and Advances 5852
• Other Current Assets 73
• Secured Loans repaid 2969
• Sub-total 41931
• Increase in Reserves 1781
• Others 141
• Total Applications 43853

29. Funds Flow Analysis-
Reliance Industries Limited
• Long term Sources: Rs. Crores
• 43853 minus 5460 (CL+)-890(Def.tax)
=37503
• Long term applications:
• 27104(FA)+5812(Inv)+2969(loans)=35885
• (continued on next slide)

30. Funds Flow Analysis-
Reliance Industries Limited
• Short term sources = 5460+890=6350 crores
• Short term uses = 12976 crores(CA)
• Unsecured loans + share warrants=13305 crores
plus part of profits have been used for acquiring
fixed assets of 21704 crores

31. Funds flow analysis-
Reliance Industries Limited
• CA increase 7051 crores as against CL
increased by 5280 crores.
• Note: Statement of changes in working
capital is not prepared as a separate
statement, but changes ae included in
Sources and Uses of funds.

32. Next Quiz
• 11th December, 2010. Date will be
confirmed and time, and venue will be
announced by Exam and Academics dept.
• Syllabus – All what has been taken up in
class till 5th December, 2010.
• Mis Sem Exam or one more quiz will be
conducted even earlier or this date may be
advanced or pre-poned.