In accounting, there are usually four kinds of financial statements: income statement, balance sheet, fund flow, and cash flow statements. In this article, we dive into the cash flow and fund flow statements and the difference between them.
Differences between cash flow and fund flow
So, what is the difference between cash flow and fund flow? A corporation’s cash flows and fund flow statements are two indicators used to measure funds over time.
A cash flow statement tracks the influx and outflow of a company’s cash and cash equivalents during a specific period. You can find the cash and fund flow statements in PDF, PPT, and tabular forms; using these forms, you can learn more about the differences between these two terms.
On the other hand, there are two types of fund flow statements: one is used for accounting, and the other for investment purposes. However, fundamentally they both show the flow of cash coming in and going out of the company’s hands.
In tally, cash flow and fund flow statements and the difference between them provide the public with a picture of the company’s performance during a period.
A company’s cash flow statement is one of the leading financial statements for a company. It shows the flow of cash and cash-like assets during its operations during a timeframe. It is a report required by the GAAP (Generally Accepted Accounting Principles).
An income statement also records cash flow or transactions that have not been realized, such as uncollected revenue. In contrast, cash flow statements will have this data included and thus will give a more accurate picture of a company’s profits and revenue generation.
Companies have several sources of cash revenue, such as selling goods, providing services, selling current assets, interest earnt on investments, rent from properties, loans, or freshly issued shares. Cash outflows can result from making purchases, expanding business operations, paying salaries, paying back loans, or paying out dividends.
Cash flow statements divide cash flow sources into three different categories for easy understanding:
- Cash flow from business operations. All the money generated from the business’s core operation would be mentioned in this category.
- Cash flow from investments. This section covers any cash spent on investments like new equipment, etc.
- Cash flows from financing activities. This part includes any cash transactions involving debtors, such as dividends paid to investors or proceeds from new debts.
The SEC (Securities and Exchange Commission) requires all companies to publish their finances using accrual accounting. This accounting style ignores the actual balance of on-hand cash on hand, which is why cash flow statements are important for investors and lenders as they rely on its analysis to evaluate a company’s cash flow management and liquidity. It is a much more reliable tool compared to the hand-picked metrics used by companies to exaggerate their success, such as gross earnings before interest, taxes, depreciation, and amortization (EBITDA).
The fund flow statement became an accounting requirement of the GAAP between 1971 and 1987. While it was required, the fund flow statement was primarily used to report the change in a company’s net working capital, assets, and liabilities during a period. Although this report is no longer mandatory, it is still used for investment purposes. The difference between the fund flow statement and the cash flow statement makes it a valuable data source.
When used for investment purposes, the fund flow statement does not show a company’s cash position because it is already shown in its cash flow statement. Instead, it illustrates the net movement of monetary funds and can also identify unexpected outliers, such as an irregular expense.
Fund flow statements can also gauge investor sentiment related to different asset classes. For example, suppose the flow of funds for equities is positive. In that case, it can be assumed that investors have an overall optimistic view of the economy or good profitability of listed companies in at least the short run.
Key differences between fund flow and cash flow statements
The fund flow statement is an earlier version of the cash flow statement. The latter is more comprehensive and contains details about the flows of cash and equivalents of a company rather than just placing the focus on working capital.
The difference between cash and fund flow statements means their analysis can be used to understand several things. Cash flow statements are best used to understand the liquidity power of a firm. In contrast, the fund flow statement is better for long-term financial planning, which is why together, both are powerful tools for investors.
The bottom line
We looked at the important differences, not the top 10, between the cash flow statement and the fund flow statement. It is essential to make out what is the difference between fund flow and cash flow because money and its management play a crucial role in a company’s future success. They are essential when analyzing a company for investments or regulation. It is because the fund flow identifies the sources and uses of cash, while the cash flow starts by taking the opening level of cash and showing how the company got to the closing balance of cash. Also, both help investors and the market understand how a company is doing on a periodic basis.