Lesson No. 21- Funds Flow Statement

***** Lesson no 21 *****

Today we are discussing a very important aspect of Funds Flow Analysis.
Any Business Operation is a Resources raising and Resources deploying activity with an intention to earn profit. This is Sources and Uses of funds.
FUDS are things having economic values. Cash is most liquid out of different types of funds it can be converted into goods also Credit can be utilised to acquire goods.
FUNDS= Cash+ Credit+ Exchange Transactions.
Thru Exchange Transactions also economic values are shifted.
Say Land given to an enterprise by its partner will be equal to Capital brought in.
We make use of two imp basic statements B/S and Operating Stt.
Balace Sheet- It is a snap shot or a still photo of Assets and Liabilities as at a point of a time.
Operating Statement -A Stream of Inflows ie Incomes eg Sales and Outflows or Expenses eg Pay of wages. Thus it is a statement of Flow of Funds.
Hence by studying theses two statements we can arrive a total picture of Sources and Uses of Funds.l
Let us do it step by step.
(A) For running any Economic activity say business, profession, trade,Industry,Agricultural ASSETS (FA, CA and N C A) are essential. They are acquired by raising Liabilities (Capital brought in,Loan raised from Bank or others Deposit take from friends etc).
(i) Thus any Increase in Liability is SOURCE of FUNDS.
(ii ) Now each Rupee raised is utilised to buy an asset and thus increase in asset is a USE of FUNDS.
Can we infer that Funds Flow statements is a Summery of Money ploughed in and gone out.In common parlance it is often ref erred as where got where gone stt.
Some examples
*** TEST Y's ****
Item. (Increased) S/U
Capital raised(L)100 to 120 (S)= 20
Term Loans ( ? )200. 300 (S) 100
FIxed Asset. (A). 400 520 ( ?) 120
Working Cap.(L) 250. 300 ( ? ) 50
NCA. ( ? ). 60. 70 (? ) 10

(iii) Second concept is about reduction in Liability or Asset
An EMI ie TL of Rs20 repaid
Thus o/s 300 to 280 ie Reduction in liability,thus Rs20 was utilised for repayment of Loan(liability).Thus it is USE of funds.
Similarly CA say FG Stock sold and value changes from100 to 80 thereby cash of Rs20 was received. There was REDUCTION in Asset but had added to the SOURCE of finance.
We can say now that
1 Any Add. in Liability is a S of Fund 2.Reduction Assets. S of Fund
3Any Add. in Asset is a U of Fund
4.Reduction in Liability U of Fund
PLEASE read 1 to 4 twice.
A SMALL QuIzE ????? S/U
Debtors o/s 75 to 90 (CA+)=+15 ( )
Creditors 140 to100( +)=-40 ( )
Reserves. 170to 200 ( +) = +30( )
Mach'ry a/c155 to175 ( +) = +. ( )

(B) Now let us refine our knowledge. We had observed earlier that Operating Statement is in fact a Funds flow Statement for the entire year.Hence we will combine figures from Operating Statment to obtain the total picture of Funds Flow.
i) Net PB Tax Funds inflow 15,021
ii)Depr.Added 2,620@
Gross Funds generated = 17,641
This is total Source (Funds) from Operations.
(@Since funds have not been paid out to anyone.)
This amount will be Utilised say for
Taxes 3,755 Use of Fund
Pay Divided5,000. Used of Fund.

Now by Combining these two we get the FF statements.
Sources and Uses are further Refined into
Long term Sources LTS
Short term Sources STS
Long term Uses LTU
Short term uses. STU

* LTS - LT U= L T Surplus
Working Capital Gap [WCG] = Total Current Assets TCA -- Total Current Liabilities TCL( excluding Bank Borrowing for WC)
This should equal to Increase in Bank Borrowing.
e.g. LTS = 20 ; WCG = 30
Hence L T S - WCG = (- )10 **
Bank Borrowing from 2 years B/S say 120 and 130
Increase in Bank Borrowing = 130-120 = (+10) **
** Always Tally in FF statement.
By studying FF statement we understand
1. From where the client has brought funds and of what nature ie ST or LT
2 Where they have deployed ST or LT
3 Whether any diversion from earlier projected figures or without our knowledge.
Remember LTS is more than LTU indicates that some amount out of LTS is utilized for STU and it is a strength (as STU can be converted i to cash which will be available for repayment of LTL).

Remember following changes do not affect the FF statement
1 Issue of Bonus Shares
As Capital will go up but Reserves will go down by equal amount.
2 Asset Revaluation
i) Value goes up
FA (LTU) will go up where as Reserves(LTS) goes down by equal amount.
ii) Value goes down say Assets destroyed
FA(LTU) goes down where as Reserves (LTS) will also go down equal amount.

Let us close the discuss
Give Rating

1 * / 2 ** /3***/ 4 ****/5*****

In Next lesson I desire to give a Practical Tutorial on Funds Flow Statement.
Say --- "Y". Or. "N"

Good by
Waman Gokhale

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