In common dialects, cash and funds are used interchangeably. Nevertheless, when it comes to accounting, the two projects have significant differences in their scope and utility, among other factors. Businesses measure up, calculate and analyse their cash flow and fund flow to arrive at necessary financial conclusions and formulate future strategies accordingly.
The primary difference between the two is that money available in physical form as a currency is termed as cash, while funds concern all the financial resources.
Thus, the difference between Cash Flow and Fund Flow highlights the conceptual limit of cash and a broader inclusion for funds.
What is Cash Flow?
Cash Flow is a unified term for the inflow as well as the outflow of cash and its equivalents for an entity throughout a given period.
One of the essentials of financial statements, the cash flow statement, highlights changes in a company’s cash for the specified period, either annually, semi-annually or quarterly.
The statement also serves as an analytical reconciliation of the difference between the opening cash balance for a company and its closing balance in a given period.
It is typically different from the income statement, which generally takes into account other accruals and deemed payments, such as uncollected customer payments or unpaid debtors, as well.
The sources of inflow or outflow of cash for an entity are broadly divided into three segments. They include –
Operating Activities
Cash generation and payment related to the core operations of a business are recorded as sourced from operating activities.
Investing Activities
Any long-term investments made, such as the purchase of fixed assets or debts paid in cash are recorded under investing activities.
Financing Activities
Cash involved in raising capital via debt or equity financing, along with payments met in the form of dividends, are identified as sourcing from financing activities.
Computation of cash flow for a given period is done via the preparation of the cash flow statement, which can be carried out through either direct or indirect methods.
Now, the typical inflows of cash in business are recorded sales of goods or services, asset sale, earnings from investments as interest, debt financing, share, issue, etc.
In the case of cash outflows, the sources can be recognised as debtor payments for purchases made, repayment of debts, dividend distributions, asset purchases, salary or rent payments, etc.
These inflows and outflows are thus segregated into the three heads as mentioned above and adjusted to arrive at the total cash in hand at a period’s end.
Since all accounting records are made on the basis of accrual, it is essential to identify the actual cash flow and prepare a statement thereon that helps in the assessment of a company’s current liquidity position. An in-depth cash flow analysis also guides other critical identifications for efficient cash management.
What is Fund Flow?
Fund Flow is typically referred to as the working capital of a business and is analyzed to identify and determine the changes in the working capital for a given period along with its reasons.
While both cash and fund flow are a part of financial accounting, the latter focuses on the net movement of funds, both inflows and outflows.
To keep a record of such changes, a fund flow statement is prepared periodically. Such a statement also helps identify any irregular changes in funds, which remain out of a company’s character to involve in.
As against internal requirements, a fund flow statement is prepared keeping in mind the needs of investors to be aware of the business activities of the company they have invested in.
Today, with a fund flow statement, it is easier to identify investor sentiment, as the changes in different asset classes are highlighted.
Primarily, two major sources of Fund Flow are identified. They include –
- Fund flow in business operations.
- Funds raised for the long term through an asset sale or share issue.
The changes to a company’s working capital can be made in various ways. Mostly, the sources of fund inflow can include share or debenture issue, loans availed, etc.
An outflow of funds can be characterised via activities like fixed asset purchase, share or debenture redemption, a payback of loans, etc. These changes are thus either recorded under funds from business operations or as long term funds.
A close analysis of the fund flow statement so prepared enlightens one on the reasons for working capital change between one balance sheet preparation date and another via changes in non-current assets and liabilities.
It also displays an organisation’s financial status by facilitating the comparison of two accounting periods.
Thus, with this understanding of cash and fund flow, let’s take a better look at the primary points of difference between the two.
Cash Flow vs Fund Flow: An Overview
The cash flow vs fund flow difference not only limits their methods of recording but also their utilisation and purposes fulfilled.
Points of Difference | Cash Flow | Fund Flow |
Meaning | It represents the inflow and outflow of cash as well as its equivalents for a specified period. | It highlights any changes in working capital of a company from the end of one period to another. |
Accounting Method | Accounting for cash flow is done only when liquid cash is involved in the form of currency or bank transfer. | Fund flow is accounted on the basis of accrual of funds and not actual payment or collection. |
Utility | Cash flow is used to identify the net cash flow of a business for a given period. | Use of fund flow extends to the understanding of a company’s overall financial standing. |
Analysis of Business Position | Cash flow calculation helps identify a business’s liquidity position for the short term. | Calculation of funds flow helps assess a business’s position in the long term. |
Disclosures Made | All disclosures pertaining to cash inflow and outflow are made under cash flow. | Funds flow allows disclosure and identification of all the sources of funds generation and the application thereof. |
Inclusion in the Annual Financial Statement | Inclusion of a cash flow statement is mandatory in the annual financial statement of specified companies. | Inclusion of fund flow statements in the annual financial statement is not statutorily required, and a business can do so to generate investor confidence or meet their demands thereon. |
Use in Budgeting | Cash flow statement and analysis helps in cash budgeting for a business. | Funds flow statements and analysis usually serve to help in the periodic capital budgeting for a business. |
While these were the points of difference, their computations come with separate advantages and limitations. Nevertheless, thoughtful analysis of the two also bears critical results for a company.
Strategies devised based on the fund flow and cash flow analysis can prove to be decisive for a company’s performance and liquidity in the long run.
Proper positioning of cash and fund flow obtained through such analysis can define a business’s sustenance in the long run through the preparation of plans and policies, solvency determination and liquidity.
