Cash flow and fund flow are accounting terms that are often used interchangeably. However, these two differ, and understanding the nuances is essential for investors and analysts. So, what is the difference between cash flow and fund flow, and what is their importance in businesses? Let us see below.
Cash flow vs. fund flow: an overview
Cash and funds serve different purposes in business and aid in developing financial plans. These two are presented in the cash flow and fund flow statements, which are critical in determining a company’s financial health.
There is a vast difference between a cash flow statement and a fund flow statement. Whereas the first shows the flow of cash in and out of a company over a certain period, the second reflects the changes in a firm’s financial position over a certain period, such as a month, a quarter, or a year.
Another difference between fund flow analysis and cash flow analysis is that the fund flow statement serves two purposes. One is accounting, and the other is for investing purposes; that is, investors and analysts can use it for analysis when trading securities.
Let us now see what makes the difference between cash flow and fund flow statements by looking at each below.
Cash flow
It refers to the inflow and outflow of cash or its equivalents in a business. Inflow is the money the company receives, while outflow is the amount it spends. The inflows and outflows are recorded in a cash flow statement — a standard financial statement per generally accepted accounting principles. It provides information to analysts, investors, or corporate institutions on how a company earns its revenue, how it manages operations, and if it can pay off its debts.
Along with the cash flow statement, other crucial ones include the balance sheet and income statements. However, the cash flow statement acts as a checkbook, reconciling these two. It shows if the revenues recorded on the income statement have been collected.
Cash flow sources come from different activities categorized in a statement. These include:
- Operating activities — Cash that a business generates from its primary activity.
- Financing activities — Cash spent on long-term investments such as purchasing new equipment or property.
- Investing activities —Cash that a company generates or uses from activities such as issuing equity or debt or repaying a debt.
Let’s take a closer look at possible sources of income.
Sources of a company’s inflows
A business can get revenue from any of the following sources or several at once:
- Income from investments.
- Income from rental properties that a company owns.
- Revenues from sold products or services of a business.
- Interest income from investments.
- Income from selling assets, such as equipment or property.
- Service income.
- Government subsidies and grants.
It may also include funding from investors or financial institutions, among others.
Sources of a company’s outflows
Money can leave a company in any of the following ways:
- Operational expenses such as rent or wages.
- Capital expenditures like the purchase of equipment.
- Paying dividends to shareholders.
- Research and development costs.
- Investment in other companies.
- Debt or loan repayment.
- Taxes.
Note that you may not see all expenses on the cash flow statement. This is because the expenses a business accrues are not always paid as per the period the statement is being prepared. Also, if a firm incurs liabilities, the cash flow statement will not record the transaction as an outflow until the amount is paid.
Fund flow
It represents how cash flows in and out of a company’s financial assets. It gives information about the source of funds and how they were applied, thus being more detailed than the cash flow statement, which basically records the inflow and outflow of cash without specifying the source. A fund flow statement can be monthly, quarterly, or yearly measured.
Fund flow does not state how the specific asset has performed but only shows the transaction. For instance, if the said asset is mutual funds, the statement will only record the inflows which come from the purchase of the shares and the outflows resulting from the redemption of those shares.
A fund flow statement is vital to a business because it highlights unnecessary flows which might cause harm to it. It is also crucial to investors and market analysts since they can gauge the performance of a specific asset or even the whole market. This information will help them withdraw or hold their investments and profits if they consider a decline or increase.
Key differences
The main difference between fund flow and cash flow is that the first analysis or statement is used to determine the financial position of a business. In contrast, the second one gives comprehensive information about a company’s cash flows, including its working capital.
Another difference between these two is that the objective of a fund flow statement is to identify the reasons for changes in assets, equity capital, or liabilities, while the main aim of a cash flow statement is to determine the cash requirements and the position of cash in the business.
Another notable difference between the fund and cash flow statements is their usefulness to investors. The first one analyses long-term financial planning; hence investors can rely on it when looking for an asset to invest in, whereas the second statement only records the liquidity of a company.
Below, we shall summarize 10 differences between a cash flow statement and a fund flow statement in tabular form:
| Cash flow statement | Fund flow statement |
| Shows the movement of a company’s cash only. | Shows how working capital changes over time. |
| You can get information about a company’s net income from it. | You can get information about a business’s financial position from it. |
| It provides information about the firm’s liquidity. | It includes information about the solvency of the company. |
| It shows how cash is generated and used in a specific period. | It reflects how a firm’s financial position has changed during a particular period. |
| It is helpful for cash budgeting. | It is often useful for capital budgeting. |
| It shows the information on what transpired between the opening and closing balance. | It does not show the opening nor the closing balances but the source and utilization of funds. |
| The accounting technique is cash-based. | The accounting technique is accrual based. |
| It is used for short-term analysis. | It is functional in long-term analysis. |
| It is part of the financial statement. | It is not included in the financial statement. |
| A positive net cash flow can be analyzed as an improved working capital position. | A positive net fund position does not necessarily mean a sound cash position in the business. |
Conclusion
How money flows in and out of business is important for its growth. Investors, analysts, and financiers need this information to decide if their effort in the company is worth it or not. Hence, an update of the cash flow and fund flow statements cannot be ignored.
You can gain more understanding of what the difference between cash flow and fund flow statements is in Tally by reading this and this article as well as ppt and pdf documents.
