Funds flow statement: meaning & uses

A funds flow statement is something that is used in many companies around the world. A funds flow statement can be described as a statement prepared to analyse the reasons for changes in the financial position of a company between two balance sheets. The main role of a funds flow statement is to show the inflow and the outflow of company funds and is prepared to explain the changes in the working capital position of a company. It's also useful as it shows the movement and activity in relation to both long-term and short-term funds by revealing how the funds were generated and where those funds have been used.

Why are funds flow statements important?

Funds flow statements are a very important factor in any business in revealing how funds are used. The profit and loss balance sheets companies prepare are not enough to assess how your company uses their funds as this does not explain the reasoning for the change and fluctuations in their financial position. However, a funds flow statement does show this change as it explains both the source and the application of the funds. This shows that funds flow statements are important as this will help a company to view how their funding has been spent as well as plan for the future in financial terms.

The benefits of a funds flow statement

There are many benefits of a company producing a funds flow statement. The first is that the statement will help the management in a company test whether the working capital has been effectively used or not. This helps management in making policy decisions in relation to payment of dividends. Another benefit of producing a funds flow statement is that it helps investors in a company decide whether the company has managed their funds properly to help them make decisions about financing policies for the future. Having a funds flow statement showing positive flow of funds will encourage the investors to invest again in the future. Not only does a funds flow statement help investors make decisions, another benefit is that producing a funds flow statement helps the company itself to make decisions about where they will use their money in the future.