Cash Flow vs. Fund Flow: An Overview
There are generally four different kinds of financial statements in accounting: the balance sheet, the income statement, the cash flow statement, and the fund flow statement. Here, we delve into the final two.
In financial accounting, the statement of cash flows refers to the change in a company's cash and equivalents from one period to the next. The fund flow, however, has two different meanings. One is for accounting purposes, while the other serves investment purposes.
Key Takeaways
- A company's cash flow and fund flow statements reflect two different variables during a specific period of time.
- The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents).
- The fund flow records the movement of cash in and out of the company.
- Both help provide investors and the market with a snapshot of how the company is doing on a periodic basis.
- The cash flow statement is best suited to gauge a company's liquidity profile whereas the fund flow statement is best geared towards long-term financial planning.
Cash Flow
Cash flow is recorded on a company's cash flow statement. This statement—one of the main statements for a company—shows the inflow and outflow of actual cash (or cash-like assets) from its operational activities. It is a required report under generally accepted accounting principles (GAAP).
This is different from the income statement, which records data or transactions that may not have been fully realized, such as uncollected revenue or unpaid income. The cash flow statement, on the other hand, will already have this information entered and will give a more accurate portrait of how much cash a company is generating.
Cash flow sources can be divided into three different categories on a cash flow statement:
- Cash flows from operating activities: Cash generated from the general or core operation of the business would be listed in this category.
- Cash flows from investing activities: This section would cover any cash flow spent on investments like new equipment.
- Cash flows from financing activities: This category includes any transactions involving debtors, such as proceeds from new debts or dividends paid to investors.
Companies receive inflows of cash revenue from selling goods, providing services, selling assets, earning interest on investments, rent, taking out loans, or issuing new shares. Cash outflows can result from making purchases, paying back loans, expanding operations, paying salaries, or distributing dividends.
Since the Securities and Exchange Commission (SEC) requires all listed companies to use accrual accounting, which largely ignores the actual balance of cash on hand, investors and lenders rely on the statement of cash flow to evaluate a company's liquidity and cash flow management. It is a more reliable tool than the metrics companies use to dress up their earnings, such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
Fund Flow
On the accounting side, the fund flow statement was required by GAAP between 1971 and 1987. When it was required, the statement of fund flow was primarily used by accountants to report any change in a company's net working capital, or the difference between assets and liabilities, during a set period of time. Much of this information is now captured in the statement of cash flow.
For investment purposes, the fund flow does not give the cash position of a company; if a company wanted to do that, it would prepare its cash flow statement.
The fund flow highlights the movement of cash only—that is, it reflects the net movement after examining inflows and outflows of monetary funds. It will also identify any activity that might be out of character for the company, such as an irregular expense.
The use of the fund flow statement in investing is more useful today. Investor sentiment can be gauged as it relates to different asset classes. For example, if the flow of funds for equities is positive, it suggests investors have a generally optimistic view of the economy—or at least the short-term profitability of listed companies.
Key Differences
The fund flow statement is the earlier version of the cash flow statement. The cash flow statement is more comprehensive and details the multiple cash flows of a company, rather than just focusing on working capital.
The cash flow statement is best used to understand the liquidity position of a firm whereas the fund flow statement is best suited for long-term financial planning, which is why it is an important tool for investors. The fund flow statement is able to identify the sources of cash and their uses, and the cash flow statement starts with looking at the current level of cash and how it leads to the closing balance of cash.
FAQs
A company's cash flow and fund flow statements reflect two different variables during a specific period of time. The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents). The fund flow records the movement of cash in and out of the company.
What is the difference between financial flow and cash flow? ›
Fund flow is the movement of financial resources within a business, including cash and non-cash items. On the other hand, cash flow refers to a business's actual cash inflows and outflows during a specific period, providing insights into short-term liquidity and cash management. 3.
What do you mean by fund flow? ›
What Is Fund Flow? Fund flow is the cash that flows into and out of various financial assets for specific periods of time. It's usually measured on a monthly or quarterly basis. Fund flow doesn't measure the performance of any single asset but emphasizes how cash is moving.
How do you explain flow of funds? ›
The “Flow of Funds” is the movement of money in and out of bank accounts. Flows can vary depending upon the number of times money moves, the currency, the payment rail, type of business, the goods or services the business provides, by whom the business is run, and asset types that the business holds.
What are the disadvantages of fund flow statement? ›
Some disadvantages of fund flow analysis are listed below.
- Complexity: Fund Flow Analysis can be complex and time-consuming. ...
- Historical Focus: Fund Flow Analysis primarily deals with historical financial data. ...
- Limited Information: Fund Flow Analysis is limited to the data available in financial statements.
A company's cash flow and fund flow statements reflect two different variables during a specific period of time. The cash flow will record a company's inflow and outflow of actual cash (cash and cash equivalents). The fund flow records the movement of cash in and out of the company.
What is the difference between cash and fund? ›
The primary difference between the two is that money available in physical form as a currency is termed as cash, while funds concern all the financial resources.
What is cash flow in simple words? ›
Cash flow is the net cash and cash equivalents transferred in and out of a company. Cash received represents inflows, while money spent represents outflows. A company creates value for shareholders through its ability to generate positive cash flows and maximize long-term free cash flow (FCF).
What do fund flows tell you? ›
Fund flows refer to the movement of money in or out of MFs and ETFs. Outflows occur when investors redeem their shares from a fund, while inflows happen when investors purchase new shares. Fund flows are a critical indicator of investor sentiment and confidence in the underlying assets.
How to calculate fund flow? ›
The formula for fund flow is: Fund Flow = Total Sources of Funds – Total Uses of Funds. It involves subtracting the total uses of funds from the complete sources of funds, providing the net change in the organization's financial position.
There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.
What is an example of a money flow? ›
This is a monetary flow. An example of this flow would be you receiving payment in the form of a wage by the firm you are working for. Rent for land, interest for capital and profits for entrepreneurs are all nominal (monetary) flows and part of the income flow.
How to analyze cash flow? ›
One can conduct a basic cash flow analysis by examining the cash flow statement, determining whether there is net negative or positive cash flow, pinpointing how the outflows compare to inflows, and draw conclusions from that. However, there is no universally-accepted definition of cash flow.
What should not be included in cash flow statement? ›
Format of a cash flow statement
Operational business activities include inventory transactions, interest payments, tax payments, wages to employees, and payments for rent. Any other form of cash flow, such as investments, debts, and dividends are not included in this section.
What is the problem with cash flow statement? ›
Some common problems with the cash flows statement are the following: Classification differences between the operating statement and the cash flows statement. Noncash activities. Internal consistency issues between the general purpose financial statements.
What are the benefits of fund flow? ›
The importance of fund flow statements
It serves as a financial parameter that helps a company to control its finance and develop a better strategy for long term financial planning, and to utilize short term and long term funds.
What is the difference between cash flow and financial position? ›
The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. While the balance sheet shows what a company owns and owes, the cash flow statement records the cash activities for the period.
What is the difference between cash flow and financial profitability? ›
So, is cash flow the same as profit? No, there are stark differences between the two metrics. Cash flow is the money that flows in and out of your business throughout a given period, while profit is whatever remains from your revenue after costs are deducted.
What is the difference between FFS and CFS? ›
Funds flow statements record the changes in working capital. Cash flow statements record the movement of cash only. It helps understand the financial position of the company.
What is the difference between real flow and financial flow? ›
Real flow focuses on the production of goods and services and the sale of those goods and services to consumers. The real flow goes from companies to consumers. The money flow is the opposite of that; the payment that consumers make to companies for purchasing those goods and services.
