BUSINESS AS A SYSTEM OF FUNDS FLOW

BUSINESS- an organization or economic system where goods and services are exchange for one another or for money.
Every business requires some form of investment and enough customers to whom its output can be sold on a consistent
basis in order to make profit. Business can be privately owned, not-for-profit or state-owned.

Funds- (In business) refers generally to the pool of financial resources available for near-term use. The organization’s
funds include cash on hand, of course, available for immediate use, but also other liquid assets that will become cash in
the near-term

WHAT IS FUNDS FLOW STATEMENT?

Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between
beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of
time.

WHAT IS FUND FLOW?

Fund Flow is the net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured
on a monthly or quarterly basis; the performance of an asset or fund is not taken into account, only share redemptions,
or outflows, and share purchases, or inflows.

WHAT IS THE DIFFERENCE BETWEEN CASH FLOW AND FUND FLOW?

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 period basis.

ANALYZING FUND FLOWS

Fund flows can provide investors with a lot of information about where capital is being committed around the world. In
particular, the company’s annual commentary can provide unique insights to help support a global macroeconomic
investment, while active traders can look toward more real-time data to drive their intraday areas of focus.

 Fixed Income
 Asset Classes
 Portfolio Mix
 Finding Funds

FUNDS FLOW STATEMENT

MEANING OF FLOW OF FUND

 Flow of Fund means the inward and outward movement of a fund of an enterprise.
 For the purpose, Fund refers to Working Capital and flow means movement or changes.
 Therefore, Flow of Fund means movement of or changes in the Working Capital (i.e., current) items.
 Flow of Fund is identified by the means of inward or outward movement of Current Assets and Current
Liabilities.
 When Current Assets increase or Current Liabilities decrease—Inflows of Fund.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

THE FUNDS FLOW STATEMENT

 The Funds flow statement contain all the details of the financial resources which have became available during
an accounting period.
 This statement discloses the amounts raised from various sources of finance during a period.
  It explains that how finance has been used in the business.
 It is a very useful tool in analysis of financial statements which analyses the changes taking place between two
balance sheet dates.

WHAT ARE THE USES OF THE FUNDS FLOW STATEMENT?

 Fund Flow Statement acts as an important tool for financial analysis and shows the brief reasons for change in
the Working Capital between two Balance Sheet dates.
 Fund Flow Statement explains how the financial position has changed from the beginning of an accounting
period to the end of that period.
 It acts as an important instrument for allocation of resources of a concern.
 It can be used in planning a sound dividend policy.
 It is useful in forecasting the flow of funds and in projecting the working capital requirements.

LIMITATIONS OF FUND FLOW STATEMENT

 Fund Flow Statement is not a basic Financial Statement, but is a supplementary statement. It does not disclose
any new fact which is not reflected in the Income Statement and the Balance Sheet.
 It provides a partial financial information to the management.
 It cannot present the continuous changes in the financial position.
 It does not indicate the structural change of an asset or a liability.
 It is prepared on the basis of historical data.
 It exhibits the changes in the Fund position, but does not indicate the changes in the cash position, which is most
important for every business concern.

PREPARATION OF FUND FLOW STATEMENT

The changes which occurred in the current accounts as a result flow of fund are reflected in a statement known
as ‘Schedule of changes in working capital’ . The similar changes in non-current accounts are shown in ‘Fund Flow
Statement’. Therefore, following two statements under this technique.

1. Statement or Schedule of Changes in Working Capital.

2. Statement of Sources and Uses of Funds or Funds Flow Statement.

TECHNIQUE FOR PREPARING A FUNDS FLOW STATEMENT

A funds flow statement depicts change in working capital.

It will, therefore, be better for the

It can be prepared by comparing
students to prepare first a Schedule of
the current assets and the current
Changes in Working Capital before
liabilities of two periods.
preparing a funds flow statement.

The primary purpose of the statement is to explain the net change in

Working Capital, as arrived in Funds Flow Statement.
THE FOLLOWING RULES MAY BE APPLIED TO CURRENT ASSETS AND CURRENT LIABILITIES FOR PREPARING THIS
STATEMENT:

 An increase in current assets, increases working capital

 A decrease in current assets, decreases working capital
 An increase in current liabilities, decreases working capital
 A decrease in current liabilities, increases working capital

PREPARATION OF FUNDS FLOW STATEMENT

 In order to prepare a Funds Flow Statement, it is necessary to find out the “sources” and “applications” of funds.
 While preparing a funds flow statement, current assets and current liabilities are to be ignored.
 Consider the changes in Fixed Assets and Fixed Liabilities.

FORMAT OF FUND FLOW STATEMENT

SOURCES OF FUNDS AMOUNT APPLICATION OF FUNDS AMOUNT

Issue of share capital ….. Redemption of pref. share …..
Issue of debenture ….. Redemption of debenture …..
Raising of long-term loan ….. Payment of long-term loan …..
Sales of fixed assets ….. Purchase of fixed assets …..
Interest received ….. Interest paid …..
Dividend received ….. Dividend paid …..
Refund of Taxes ….. Payment of Taxes …..
Decrease in working capital ….. Increase in working capital …..
Fund from operation …..
TOTAL ….. TOTAL …..

STATEMENT OF CHANGES IN NON-CURRENT ACCOUNTS/FUND FLOW STATEMENT

 When there is no additional data apart from the balance sheets and we are sure that there are no other
transactions that have affected the noncurrent accounts.
 Therefore, we may derive the inflow/outflow by comparing the opening and closing figures.

BUSINESS AS A SYSTEM OF FUNDS FLOW

BUSINESS- an organization or economic system where goods and services are exchange for one another or for money.
Every business requires some form of investment and enough customers to whom its output can be sold on a consistent
basis in order to make profit.

-can be privately owned, not-for-profit or state-owned.

Funds- (In business) refers generally to the pool of financial resources available for near-term use. The organization’s
funds include cash on hand, of course, available for immediate use, but also other liquid assets that will become cash in
the near-term

WHAT IS FUNDS FLOW STATEMENT?

Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between
beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of
time.
WHAT IS FUND FLOW?

Fund Flow is the net of all cash inflows and outflows in and out of various financial assets. Fund flow is usually measured
on a monthly or quarterly basis; the performance of an asset or fund is not taken into account, only share redemptions,
or outflows, and share purchases, or inflows.

WHAT IS THE DIFFERENCE BETWEEN CASH FLOW AND FUND FLOW?

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 period basis.

ANALYZING FUND FLOWS

Fund flows can provide investors with a lot of information about where capital is being committed around the world. In
particular, the company’s annual commentary can provide unique insights to help support a global macroeconomic
investment, while active traders can look toward more real-time data to drive their intraday areas of focus.

 Fixed Income
 Asset Classes
 Portfolio Mix
 Finding Funds

DEFINITION OF BUSINESS

 A business is defined as an organization or enterprising entity engage in commercial, industrial, or professional

activities.
 Business ca be profit or non-profit organization.

WHAT ARE BUSINESS OPERATIONS?

 Business operations are those talks and activities that an organization undertakes to produce the services or
goods that it provides to customers.
 Efficient operations help companies reduce costs and might improve customer satisfaction as well.

FUNCTIONAL AREAS OF A TYPICAL BUSINESS

 Human Resources- responsible for the hiring, firing and keeping records of company’s employees.
 Sales and Marketing- they create and improve the product, know who the customer is, determine the price and
decide where and how to sell.
 Accounting- this area is ultimately responsible for accurately representing the financial transactions of a
business to internal and external parties, government agencies, and owners/investors.
 Finance- Although related to accounting, the finance function involves planning, obtaining, and managing a
company’s funds
 OTHER (not mentioned)
 Production
 Information Technology
 Operations
 Customer Service
 Purchasing
 Legal Department
 Business Development and Growth
HOW TO EVALUATE A COMPANY’S PERFORMANCE?

Variance Analysis

 A small business owner and his team put together an annual business plan that includes a financial forecast --
a prediction of how the company will perform from a financial standpoint. 
 Each period the actual financial results are compared to the forecast, a process that is termed variance
analysis.

Key Performance Indicators

 Key performance indicators are statistics a small business owner can track to evaluate his company’s
performance.
 KPIs help the business owner determine if all the parts are working smoothly.

Customer Satisfaction Measurement

 Maintaining high customer satisfaction is critical for a business because satisfied customers are likely to do
business with the company in the future. For a small business owner, it is important to have a system in place
to continually measure customer satisfaction.

Employee Satisfaction

 High employee turnover can be costly for a small business because of the time it takes to interview, hire and
train new people and also the lost productivity when key individuals elect to leave. The small business owner
should evaluate whether employees are satisfied with their financial compensation, working conditions, and
opportunities for training and advancement.

ASSESSMENT OF BUSINESS PERFORMANCE

Importance of Point of View

 A point of view is a valuable content strategy that allows companies to tap into the minds of consumers. Since
consumers are generally more connected to one another than they are to a company, developing a business
POV is a great way to market directly to customers and increase relatability.
 A strong point of view is a great way to brand your company as a positive, enlightened, progressive force in your
industry.
 Many business owners focus on the day-today running of their business and forget to stop from time to time
and find out how far they have come, where they are and where they are going. This is a reason for some
business failures.
 Every business has goals to reach and objectives to achieve. At every point in business you are either
somewhere or nowhere in achieving your business goals. Where you are in achieving your goals can only be
known when you evaluate your business or organization.

Management Point of View

 Business administration (also known as business management) is the administration of a business. It includes all
aspects of overseeing and supervising business operations.
 From the point of view of management and leadership, it also covers fields that include accounting, finance,
project management and marketing.

Owner’s Point of View

 Business owners are busy people, always looking for ways to improve their business and deliver a greater
product or service to the customers.
  As owner-manager of a business, or as a member of its management team, you should stand back once in a
while and review your business performance.
 The areas that need to look at are the market performance and direction – to check how well the business is
performing through sales results, and check which markets to aim for next and how to improve the
performance.

Lender’s Point of View

 Lenders do not participate in the business in the same way as shareholders, owners, or partners.
 Lenders have a different kind of risk from business owners/shareholders.
 They also have different rights if the company goes bankrupt.
 The lenders analyze the credit report and look at the business history.
 Lenders rely on financial accounting to obtain information about business financial health the risk that business
maybe facing.

THREE STAGES TO PROPERLY EVALUATE YOUR BUSINESS

1. What? You need to determine the different indicators which you intend to measure. Some of them are; level of
profit, staff turnover levels, number of customer complaints, level of customer dissatisfaction, number of
industrial disputes, return on assets, amount of wastage, etc.
2. How? You need to determine how to measure the indicators above. Information on customer complaints could
be harnessed through suggestion boxes, review programs and even open forums with customers. Those from
staff could be through open forums with them too.
However, the most conventional way to measure your performance indicators would be through data collection.
3. Why? You need to be clear on what you intend to do with the results/outcome of the evaluation.

WHAT IS FINANCIAL ANALYSIS?

 Financial Analysis is the evaluation of a business in order to determine its profitability, liabilities, strengths and
future earnings potential.
 The most common methodology of financial analysis are:
 Horizontal Analysis
 Vertical Analysis
 Ratio Analysis

HORIZONTAL ANALYSIS

 Horizontal analysis is the comparison of historical financial information over a series of reporting periods, or of
the ratios derived from this information.
 It is used to see if any numbers are unusually high or low in comparison to the information for bracketing
periods, which may then trigger a detailed investigation of the reason for the difference.

Evaluates:

o Income Statement
o Balance Sheet

FORMULA: Current Year Amount – Base Year Amount

Base Year Amount

PURPOSE OF THE HORIZONTAL ANALYSIS

 Horizontal analysis is used for annual budget making process.

 Horizontal is helpful for shareholders to check their performance and also to improve their weak areas.
  Horizontal is very useful for investors to find the percentage change in the financial position of the business.

Example of Horizontal Analysis

VERTICAL ANALYSIS

 Vertical analysis is a kind of financial statement analysis wherein each item in the financial statement is shown in
percentage of the base figure.
 This is one of the popular methods of financial statements analysis used as it is simple and also called a common
size analysis.

Example of Vertical Analysis

 RATIO ANALYSIS

 Ratio analysis is a way of expressing relationships between a firm’s accounting numbers and their trends over
time that analysts use to establish values and evaluate risks.
 Ratio analysis is very important in fundamental analysis, which investigates the financial health of companies.

USES OF RATIO ANALYSIS

1. Comparisons
One of the uses of ratio analysis is to compare a company’s financial performance to similar firms in the industry
to understand the company’s position in the market.
2. Trend Line
Companies can also use ratios to see if there is a trend in financial performance. Established companies collect
data from the financial statements over a large number of reporting periods.
3. Operational efficiency
The management of a company can also use financial ratio analysis to determine the degree of efficiency in the
management of assets and liabilities. Inefficient use of assets such as motor vehicles, land, and building results in
unnecessary expenses that ought to be eliminated. Financial ratios can also help to determine if the financial
resources are over- or under-utilized.

COMMON RATIOS FOR FINACIAL STATEMENT ANALYSIS

Current Ratio

 This ratio tells you the company’s ability to pay current debt without having to resort to outside financing.

FORMULA: Current Assets ÷ Current Liabilities

Acid Test Ratio

 The acid test ratio is similar to the current ratio, but It includes only quick assets.
 A quick asset is readily convertible to cash or is already in the form of available cash

FORMULA: Quick assets (Cash + Marketable securities + Accounts receivable) ÷ Current liabilities

Asset Turnover

 Turnover analysis shows how quickly income producing assets such as merchandise inventory comes in and goes
back out the door.
 The basic formula for calculating asset turnover is net sales divided by average total assets.

Inventory Turnover

 This activity measure shows how efficiently the company is handling inventory management and replenishment
and how fast the products are being sold. The less inventory a company keeps on hand, the lower its costs are to
store and hold it.

FORMULA: Cost of Goods Sold/ Average Inventory

Average Inventory = (Beg. Inventory + Ending Inventory) ÷ 2

Accounts Receivable Turnover

 This ratio shows the average number of times accounts receivable (A/R) is turned over — that is, booked and
paid — during the financial period. The sooner a company collects receivables from its customers, the sooner
the cash is available to take care of the business’s needs.
 FORMULA: Net Credit Sales ÷ Average Accounts Receivables