Introduction And Meaning Of Funds Flow Statement
A statement which is prepared to show the changes (increase or decrease) in the working capital of a firm is called funds flow statement. It is a financial document that analyzes the sources and uses of funds in the business. It shows the movement of funds by comparing the balance sheets of two accounting periods. Funds flow statement helps to determine the financial strength or weakness of the business firm.
Importance Of Funds Flow Statement
Significance or importance of preparing funds flow statement can be summarized as below:
1. To Reveal The Financial Position
Funds flow statement identifies the sources of fund and areas where the company used those funds. It also reveals the changes in the working capital of the firm by comparing the balance sheets of two accounting periods. So, it helps to determine the current financial position of the company.
2. Evaluation Of Performance
It generates important data regarding the sources and application of funds in the company. It also shows the changes in the financial position of the business between two periods. So, it helps the management to evaluate the performance and facilitates to take corrective actions if needed.
3. Utilization Of Working Capital And Other Resources
Funds flow statement provides accurate data and shows the current financial status of the business. It encourages management for proper use of working capital as well as other available resources to achieve better result.
4. Shows The Creditworthiness
Banks and financial institutions use the funds flow statement to check the creditworthiness of the firm before providing loan to the business firm. Therefore, it is very important document for every business organization.
Also Read:
Importance Of Cash Flow Statement
Importance Of Financial Statement Analysis
Meaning and importance of ratio analysis
5. Assists Future Planning
Funds flow statement is useful to make future financial plans and policies. Management makes financing and investment decisions on the basis of data provided by this statement. So, it can be used as a future guide.
6. Useful For Dividend Policy
It shows the financial condition (liquidity, solvency and profitability) of the business which helps the company to form dividend policy of the firm.
