Importance of Fund Flow Analysis

Fund flow analysis is important tool of financial analysis. It is also significant for financial management. Today, financial analysts, credit providing agencies and financial managers use it at large scale. Fund flow analysis's main aim is to check the changes in fund and working capital between two financial periods. Fund flow analysis is  also helpful for making projected funds flow statement and make the better plan for needed fund.

With following advantages of fund flow analysis, we can find the importance of fund flow analysis.

1. It helps in the analysis of financial positions

We know the financial statement shows the net effect of all the transactions on the financial position of company. Balance sheet is also only show the picture of our current financial position on a specific date. But these financial statement does not show the reasons of differences in the assets and liabilities between two financial period. In fund flow analysis, we make the fund flow statement for knowing the reasons of changing in the assets and liabilities. Sometime, we have good financial performance but we have using our fund in bad area. All these reasons can come only analysis of fund flow statement.

2. It throws light on perplexing questions

Fund flow analysis does not only throw the light on perplexing questions but it helps us to solve such questions. These questions are :

a) Why are our net current assets decreasing even after obtaining higher profit?

b) Why did we not issue the dividend when we have high profit level?

c) What happened with our net profit, whether did it go?

d) What happened the money which we have obtained after sales of shares, debentures and other fixed assets?

e) What are the main resources of redemption of debts?

3. It helps in the formation of a realistic dividend policy

Fund flow analysis is helpful for formation of a realistic dividend policy. Net profit is also a source of fund. Fund flow analysis can tell where are we using this fund. On the analysis, we can decide how much rest fund can be used for providing the dividend to the shareholders.

4. It helps in the proper allocation of resources

Sources of funds are limited if we have good monitoring capacity to check the application of fund, we can use our limited resources better way. It can only be possible with fund flow analysis.

5. It helps in appraising the use of working capital

Working capital is the life blood of business. If we use it efficiently, we can grow our business. In fund flow statement, we learn to check the main changes in working capital and its analysis helps us to know where did we do mistake in using of working capital. So, fund flow analysis are helpful in appraising the use of working capital.

6. It acts as a future guide

Fund flow analysis acts as our future guide because it guides to solve the problems which will arise due to shortage of our fund. Organisation can manage their fund proper way if it has done the analysis proper way.

7. It helps in knowing the overall credit worthiness of a firm

Every bank demands the fund flow statements of past years. All fund flow statements are analyzed under a systematic way and with the team. On this basis, loan are given. If bank finds that company has misused the fund, then they stop to give loan to such company. 


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Accounting Education: Importance of Fund Flow Analysis
Importance of Fund Flow Analysis
Accounting Education
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