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FUNDS FLOW ANALYSIS

FUNDS FLOW ANALYSIS. Flow of funds in and out of the business entity is a regular feature. The flow takes place through cash, credit or exchange transactions

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FUNDS FLOW ANALYSIS

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  1. FUNDS FLOW ANALYSIS • Flow of funds in and out of the business entity is a regular feature. The flow takes place through cash, credit or exchange transactions • Thus, raising and deployment of fund is an almost continuous process, which requires close monitoring to achieve the organisaatinal goal of profit maximisation. • Any increase in assets means use of funds and any decrease in assets as source of funds. Likewise, any increase in liabilities results into sources and decrease in liability as uses of funds.

  2. Increase in liability or decrease in asset is a source of funds. Decrease in liability or increase in asset is use of funds

  3. However, there are few transactions, which may result in the changes in assets or liabilities but there may not be any flow of funds.For instance:i) Issue of bonus sharesii) Revaluation of Assetsiii) Loss of goods due to fireWhile comparing the figures of balance sheet we can obtain sources and uses of funds during a given period. For instance the value of net fixed asset shown in a balance sheet for the year 1998 and 1999 were Rs.45 lakhs and Rs. 55 lakhs and the purchases of fixed assets during the year 1999 were of RS. 15 lakhs.Then, the changes of Rs. 10 lakhs as per balance sheet will show as use of funds whereas actual use has been of Rs. 15 lakhs.

  4. A decrease in NWC is considered source of fundsAn increase in NWC thus considered use of funds

  5. SCHEMATIC PRESENTATION OF FUNDS FLOWOpening Changes in ClosingBalance of Working BalanceNWC Capital of NWCSOURCES OF WORKINGUSES OF WORKINGCAPITALCAPITAL* Business operations * Acquisition of Fixed Assets* Sale of Fixed Assets * Long Term Investments* Sale of Long Term * Repayment of Long Term Investments Debts* Issue of Long Term Debt * Payment of Dividend * Issue of Equity

  6. Sources of funds1. Decrease in non-current assets2. Increase in non-current liabilities3. Increase in owner’s equity4. Business OperationsUses of funds1. Increase in non-current assets2. Decrease in non-capital liabilities3. Decrease in Owner’s equity

  7. From the funds flow statement one can know the following:1. Funds provided by business operations2. Changes in NWC over the period3. Amount of NWC deployed in the business4. Which long term sources of funds can be further trapped to finance current assets ?5. Is the ratio between sources of short-term funds and long - term funds reasonable ?6. What corrective action should be initiated by the management, if problems are spotted in both in investment and financing ?

  8. FORMAT FOR FUNDS FLOW STATEMENTFUNDS FROM PETTAIONSAmountNet Profit after Tax ADD: Depreciation Any other amortisation expenses Loss on sale of assetsLESS: Gain on sale of asset _____________ FUNDS FROM OPERATIONS

  9. FORMAT FOR FUNDS FLOW STATEMENT Contd…SOURCES OF FUNDSAmount1. Funds from operations2. Increase in Capital3. Increase in Term Liability4. Decrease in a.Fixed Asset b.Other non-current asset __________TOTAL SOURCES(Total of 1 to 4)

  10. FORMAT FOR FUNDS FLOW STATEMENT Contd…USESOFFUNDS:Amount1. Dividend payment2. Decrease in Term Liability2. Increase in a. Fixed Asset b. Other non-current asset4. Net Working Capital ________ TOTAL USES ( Total of 1 to 4 )

  11. CASH FLOW STATEMENT The Cash flow statement enables one to know the closing balance of cash and changes in other assets. Which have led to the change in the cash balances. It also enables one to know • Changes which have taken place in cash over time. • The amount of cash provided by the operations of the business • How much cash is used and for which purpose • How much more cash is required to be obtained etc ?

  12. SCHEMATIC PRESTNTATION OF CASH FLOW Opening Change in Closing Balance Balance of Cash Cash Of Cash SOURCES OF CASHUSES OF CASH* Net decrease in current assets other * Net increase in current assets other than cash than cash * A gross decrease in fixed assets * A gross increase in fixed assets * A net increase in current liability * A net decrease in current liability * A net increase in non-current liability * A net decrease in non-current liability * Proceeds from the sale of equity/ * Redemption of preference shares preference shares or loans * Cash from operations * Cash loss in operations

  13. FORMAT FOR CASH FLOW STATEMENTCASH FROM OPERATIONS: AmountNet IncomeADD: Depreciation Amortisation expenses Loss on sale of non-current assets (except cash) Increase in each current liabilityLESS: Gain on sale of non-current assts Increase in each current assets (except cash) Decrease in each current liability ____________cash from operations ( + / -)

  14. FORMAT FOR CASH FLOW STATEMENT Contd…STATEMENT OF SOURCES AND USES OF CASHSOURCESAMOUNTCash from operationsSale of long-term investmentsSale of other fixed assetsShare Capital _______ TOTAL SOURCES (A)USESAMOUNTAcquisition of fixed assetsPayment of dividendPurchase of marketable securitiesChange in cash ( +/_) _______ TOTAL USES (B)Change in Cash (+ / -) (A- B) _______

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