Importance and shortcomings of fund flow statement

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Funds flow statement is a financial statement, which shows as to how a business entity has obtained its funds & how it has applied or employed its funds between the opening & closing balance sheet dates(during the particular year/period.

Importance of funds flow statement:

Funds flow statement is an important analytical tool for external as well as internal uses of financial statements. The users of funds flow statement can be listed as under :

1. Managements of various companies are able to review cash budgets with the aid of funds flow statements. They are extensively used by the management in the evaluation of alternative finance & investments. In the evaluation of alternative finance & investment plans, funds flow statement helps the mangement in the assessment of long-range forecasts of cash requirements & availability of liquid resources. The management can judge the quality of management decisions.

2. Investors are able to measure as how the company has utilized the funds supplied by them & its financial strength with the aid of funds statements. They gauge can the company capacity to generate funds from operations. On the basis of comparative study of the past with the present, investors can locate & identify possible drains on funds in the near future.

3. Funds statement serve as effective tools to the management for economic analysis as it supplies additional information, which cannot be provided by financial statements, based on historical data.

4. Fund statement explains the relationship between changes in working capital & net profits. Funds statement clearly shows the quantum of funds generated from operations.

5. Funds statement helps in the planning process of a company. They are useful in assessing the resources available and the manner of utilization of resources.

6. Funds statement explains the financial consequences of business activities. They provide explicit & clear awareness to questions regarding liquid & solvency positions of the company, distribution of dividend & whether the working capital has been effective or otherwise.

7. Management of companies can forecast in advance the requirements of additional capital & can plan its capital issue accordingly.

8. Fund statement provide clues to the creditors & financial institutions as to the ability of a company to use funds effectively in the best interest of the investors, creditors & the owners of the company.

9. Funds statement indicates the adequacy or inadequacy of working capital.

10. The information contained in fund flow statement is more reliable, dependable & consistent as it is prepared to include funds generated from operations & not net profit after depreciation.

11. Funds flow statement clearly indicate how profits have been invested, whether investments in fixed assets or inventories or ploughed back.