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Fund Flow Analysis

>> February 21, 2010

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Fund flow analysis is the analysis of flow of fund from current asset to fixed asset or current asset to long term liabilities or vise- versa. First of all, we make fund flow statement and then study its cause and effect  deeply and try to find many important facts and information which can be used in business. It can also solve following problems.

Q: - 1. Why are net current assets decreasing after getting high volume of net profit?

Ans. Fund flow statement is made by take two period balance sheets and if we study it then we can find that it may possible that we are using net profit for purchasing fixed assets. Statement of changing in working capital can also show net decrease in working capital.

Q:-2.Why did company not issued high dividend, even company had earned high profit in last year?

Ans. You know that dividend is given after seeing the level of fund from operation not net profit. If company has made fund flow statement, then fund from operations will be the source. Financial analyst should check this amount and suggest board of directors what amount will be suitable according to the revenue performance of company. So, it is not necessary that high profit level will give high dividend to shareholders.

Q: - 3. How did company use the net profit?

Ans. Fund flow statement provides clear picture of sources and utilization of fund and if we take some adjustments of non operating items, then we can know the amount of fund from operation and it is compared with fund used. So, it may possible that we had used it for purchasing fixed assets or repayment of loan.

Q: - 4. What are the main sources of redemption of loan?

Ans. Loan is the main fixed liability of business and if it has increased from previous period, then if we study sources of fund from fund flow statement, then we can estimate that whether sources are strong to repay all the amount of loan or not. Suppose, if we are taking another loan to repay the amount of payable loan then it is not good source but if we have received large money from operation as source for repayment then it can be said that it is good source of fund.

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