Difference between a cash Flow Analysis and a Funds Flow Analysis
1. A Cash Flow Statement is concerned only with the change in cash position while a Fund Flow Analysis is concerned with change in working capital position, between two balance sheet dates. Cash is only one of the constitutents of working capital besides several other constitutents such as inventories, accounts receivables and prepaid expenses.
2. A f’s*sn Flow Statement is merely a record of cash receipts and disbursements. Of course, it is valuable in its own way but it fails to bring to light many important changes involving the disposition of resources. While studying the short term solvency of a business one is interested not only in cash balance but also in the assets which can be easily convertible into cash.
3. Cash flow analysis is more useful to the management as a tool of financial analysis in short periods as compared to funds flow analysis. It has rightly been said that shorter the period covered by the analysis. For example, if it is to be found out whether the business can meet its obligations maturing after 10 years from now, a good estimate can be made about the firm’s capacity to meet its long-term obligations if changes in working capital position on account of operations are observed. However, if the firm’s capacity to meet a liability maturing after one month is to be seen, the realistic approach would be to consider the projected change in the cash position rather than an expected change in the working capital position.
4. Cash is part of working capital and therefore, an improvement in cash position results in improvement, in the funds position but the reverse is not true. In other words, ‘inflow of cash’ results in ‘inflow of funds’ but inflow of funds may not result in `inflow of funds’ but inflow of funds may not result in ‘flow of cash’. Thus, sound funds position does not necessarily mean sound cash position but a sound cash position generally means sound funds position.
5. Another distinction between a cash flow analysis and a funds flow analysis can be made on the basis of the techniques of their preparation. An increase in a current liability or decrease in a current asset results in decrease in working capital and vice versa. While an increase in a current liability or decrease in a current asset (other than cash) will result in increase in cash and vice versa.
Some people, as stated before, use the term ‘funds’ in a very narrow sense of ‘cash’ only. In such an event the two terms ‘funds’ and cash will have synonymous meanings.
