Financial Management

Financial System | Definition, Functions, Features, Structure, Role, Importance & Limitations

by

What is Financial System ? For economic transformation of a country, the financial system is the key for the institutional and functional vehicle. Finance assists in reducing the gap between the present and the future, and covers every aspect like channelization and effective usage of savings and making an efficient investment. It formulates the base, the … Read more

Financial Statement Analysis | Definition, Objectives, Types, Importance & Limitations

by

What is Financial Statement Analysis ? Meaning of Financial Statement Analysis  The in-depth study and interpretation of the data provided in the ‘Financial Statement‘ is known as ‘Financial Analysis’. With the help of various items provided in the ‘Profit and Loss Account’, ‘Balance sheet’ and other operative data and their strategics inter-relationships, it is possible to … Read more

What is Working Capital? | Operating & Cash Conversion Cycle

by

Contents :  Meaning and Definition of Working Capital. Concept of Working Capital. Nature of Working Capital. Components of Working Capital. Operating and Cash Conversion Cycle. Computation of Operating Cycle and Cash Cycle with Example. What is Working Capital ? Cash required for conducting the business, i.e., purchase of raw material and conversion thereof into finished … Read more

Cash Flow Statement: Objectives, Advantages, Disadvantages

by
Cash Flow Statement

Contents : 
  1. Meaning & Definitions of Cash Flow Statement.
  2. Objectives of Cash Flow Statement.
  3. Advantages and Disadvantages of Cash Flow Statement.
  4. Differences Between Cash Flow & Fund Flow Statement.
  5. Cash Flow Statement under Accounting Standard -3 (AS-3).
  6. Preparation and Format of Cash Flow Statement.
  7. Adjustments of Cash Flow Statement.
  8. Example with Solution of Cash Flow Statement.

What is Cash Flow Statement ?


“Cash” is a vital element of any business entity, as it plays a crucial role throughout the entire lifetime of a business enterprise. ‘Cash’ for a ‘Business’ has been aptly compared with the ‘Blood’ for a ‘Human Body’. ‘Cash’ is required to meet day-to-day requirements for running the business and for making payments to ‘Suppliers’, ‘Wages/Salaries to the Employees’, ‘Interest’, ‘Dividends‘, etc. Maintenance of an optimum level of cash is, therefore, of paramount importance for a business entity.

Definition of Cash Flow Statement :


According to Indian Accounting Standard (AS-3) :
Cash flow means inflows and outflows of cash and cash equivalents. Cash comprises of cash in hand and demand deposits with banks. Cash equivalents are short-term, highly liquid investments which are readily convertible into cash.

Cash Flow Statement’ may be defined as a statement, which depicts the changes in financial position of a business organisation due to ‘Inflows’ and ‘Outflows’ of cash. Analysis of such ‘Inflows’ and ‘Outflows’ is necessitated for short-range business activities.

Objectives of Cash Flow Statement :


The fundamental objective behind the preparation of the ‘Cash Flow Statement’ is to underline and emphasis the changes that have taken place in the ‘Cash Position’ during a specific period. The sources from where the cash was procured by an organisation and the uses, to which it (the cash) was put, are elaborated in the cash flow statement.

Other objectives for preparing cash flow statement are discussed in the following points :

1) Showing the Inflows and Outflows (sources and applications) of cash into/out of the business during a specific period.

2) Disclosing the ‘Positive’ and ‘Negative features of ‘Cash Management’ undertaken by the organisation.

3) Facilitating the policy formulation by the management in respect of certain financial matters such as Dividend Policy.

4) Ascertaining the Liquidity Position of the business organisation.

5) Finding out the net changes having taken place in respect of ‘Cash’ and ‘Cash Equivalents’.

6) Studying the trend regarding ‘Cash Receipts’ and ‘Cash Payments’.

7) Finding out the ‘Deviation of Cash’ from ‘Earnings’.

8) Assessing the Financial Position of the business enterprise in a more realistic manner and forecasting the ‘Cash Position’.

Fund Flow Statement | Meaning, Objectives, Advantages & Disadvantages

by

Fund Flow Statement

Contents :

  1. Meaning and Definition of Fund Flow Statement.
  2. Objectives of Fund Flow Statement.
  3. Advantages and Disadvantages / Limitations of Fund Flow Statement.
  4. Preparation of Fund Flow Statement.
  5. Adjustment of Typical Items.
  6. Statement of Sources and Uses (Applications) of Funds.
  7. Preparation of Schedule of Changes in Working Capital.
  8. Computation of Funds from Operations.


What is Funds Flow Statement ?


‘Funds Flow Statement’ is a statement which depicts the flow of working capital/funds during a specified period of time. A range of variations in working capital which has taken place during that period is revealed through the statement.

‘Funds Flow Statement’ is a technique which facilitates the study pertaining to the changes in the financial position of a business organisation which has taken place between the two financial statement dates (beginning and ending). It discloses the ‘Sources’ and ‘Applications’ of working capital for a specific period.

The statement, which is prepared with a view to ascertaining the inflow (sources) and outflow (applications) of funds, is known as ‘Funds Flow Statement’.
‘Funds Flow Statement’ may be defined in a number of ways, some of which are discussed below :

Definition of Funds Flow Statement :


According to Foulke :
“A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates”.

I.C.W.A. in the glossary of Management Accounting terms defines funds flow statement as :
“A statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise.

The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.

Objectives of Funds Flow Statement :


The statement’s main objective is to ascertain various sources from where the funds were raised and the specific manner in which they (Funds/Working Capital) were utilised between the dates of the two balance sheets.

1) The statement draws special attention to the various sources and applications of “Working Capital” of a business organisation between the two dates representing two accounting periods.

2) It highlights the financial Strengths and Weaknesses of a business organisation, which may be used as a management tool for future planning or taking corrective measures for the organisation’s growth.

3) It is an effective technique for measuring the reasons behind the changes in ‘Working Capital’.

4) In case of major deviations between the data of two Balance Sheets, it facilitates the management of the organisation in initiating necessary corrective measures.

5) Investors may also use the ‘Funds Flow Statement’ of an organisation for taking a decision with regard to their investment in that organisation.

6) It reflects a detailed information in respect to the performance of the organisation with regard to its profitability, operational efficiency and financial affairs.

7) The information gathered from the Funds Flow Statement of an organisation facilitates its management in formulating various policies, e.g. ‘Dividend Policy’, /Retention Policy’, ‘Investment Policy’ etc.

8) The financial consequences of various business transactions of an organisation are easy to evaluate with the help of its ‘Funds Flow Statement’.

9) It provides a detailed account of the movement of funds from different sources or uses of funds during a specific period.

Advantages of Funds Flow Statement :


Preparation of ‘Funds Flow Statement’ is beneficial in the following manner :

1) Helps in the Analysis of Financial Operations :
The net effect of different business transactions on the Operational’ as well as “Financial’ status of an organisation are disclosed through the ‘Financial Statements‘ (‘Balance Sheet and Profit and Loss Account’) prepared for an accounting period. The ‘Balance Sheet’ reveals the position regarding various resources of funds of a business enterprise and the applications thereof as on a specific date. 
However, it does not bring to the forefront the reasons behind the changes in the assets and liabilities of an organisation between two different points of time. The analysis of ‘Funds Flow Statement’ not only explains the reasons for those changes, it also brings out the impact of such changes on the liquidity status of the organisation.

2) Helps in the Formation of a Reasonable Dividend Policy :
There may be a situation, where a company may have enough available profits for dividend distribution, still it is not advisable to distribute dividend due to liquidity constraints. Analysis of ‘Funds Flow Statement’ facilitates formulation of a reasonable dividend policy in such situations.

3) Helps in the Proper Distribution of Resources :
Generally, the resources of any organisation are constrained and it is the endeavour of the organisation to use those resources in an optimal and prudent manner. The ‘Funds Flow Statement’ is helpful to the management in taking appropriate decisions with regard to the deployment or allocation of limited resources.

4) Helps in Improving the Use of Working Capital :
A Funds Flow Statement’ reveals the efficiency of the management in utilising the available ‘Working Capital’. It also advices the steps to be taken for improving the Working Capital Management of the company.

5) Helps Knowing the Overall Creditworthiness of a Firm : 
Funds Flow Statement for a number of years is one of the most important documents required by the financial institutions and banks (e.g. State Financial Institutions (SFIs), State Industrial Development Corporations (SIDCs), Industrial Finance Corporation of India (IFC), and all the commercial banks), before granting loans.
It helps them in ascertaining the creditworthiness or repaying capacity of the business enterprise. Thus, it is mandatory for these financial institutions to prepare funds flow statement.

Sources and Uses of Funds

by

Contents : Sources of Funds. Uses or Applications of Funds. What are The Sources of Funds ? Business transactions, which result in an increase in working capital, are termed as “Sources of Funds”. Issue of New Shares/Debentures, ‘Raising of Loans’, ‘Depreciation on Fixed Assets’, ‘Profits’, etc. are some of the examples of ‘Sources of Funds’. This … Read more

Sources of Working Capital Finance

by

Contents : Sources of Working Capital Financing. Trade Credit : Advantages and Disadvantages. Accrued Expenses and Deferred Income. Commercial Paper (CP) : Features, Advantages and Disadvantages. Certificate of Deposit : Advantages and Disadvantages. Letter of Credit (LC) : Advantages and Disadvantages. Installment Credit : Advantages and Disadvantages. Bank Finance : Forms of Bank Finance. What … Read more

What is Financial Planning? | Types, Principle, Steps, Advantages and Disadvantages

by

Contents – Meaning and Definition and Principals of Financial Planning. Steps and Types of Financial Planning. Advantages and Disadvantages of Financial Planning. What is Financial Planning ? Financial planning is concerned with making optimal decision and anticipating the result of such decisions. It also carries out control function which compares the actual performance with the … Read more