The fund flow statement: where funds came from and went
A fund flow statement is an older way of telling the story of a year: where long-term money came from and where it went. Companies do not have to publish one, but it is widely taught and still useful for reading a balance sheet. This lesson builds one from two balance sheets, for a small company and for Titan, and sets it beside the cash flow statement.
- Level
- Beginner
- Reading time
- About 25 minutes
- Know this first
- Working capital and the cash cycle
By the end you will be able to:
- say what funds mean in a fund flow statement and why working capital is the usual choice
- prepare a schedule of changes in working capital from two balance sheets
- list the sources and applications of funds and show that they balance the change in working capital
- explain the difference between a fund flow statement and a cash flow statement
What "funds" means
Cash is not the only thing a business can follow through the year. A fund flow statement compares two balance sheets and shows where funds came from and how they were used between them. It is also called a statement of sources and applications of funds. The catch is the word "funds", which has more than one meaning. In the narrowest sense, funds are cash only, and a fund flow statement on that basis is simply a cash flow statement. In the sense most textbooks use, funds are working capital: current assets less current liabilities.
Why working capital? Because it separates a business into two halves. On one side is the long-term money, which comes from owners, from long-term loans and from the profits kept in the business. On the other is what that money is used for: fixed assets, investments in other companies and dividends. Working capital is what is left over to run the day-to-day trade. A fund flow statement shows how the long-term side paid for the long-term uses, and what that did to the money available for trading.
The cash flow statement of the lesson on the cash flow statement asks a different question: where did cash come from and go? Both statements are built from the same accounts, and they can tell different stories about the same year. The final part of this lesson puts them side by side for Titan.
When funds move
Because funds mean working capital, a transaction moves funds only when it changes working capital. Every transaction touches two or more items on the balance sheet. If it touches a current item and a non-current item, such as cash and a fixed asset, working capital changes and funds move. If it touches only current items, or only non-current items, working capital stays where it is.
| The transaction touches | Funds move? | Example |
|---|---|---|
| A current item and a non-current item | Yes | Cash paid for a machine |
| Two current items | No | A customer pays an old bill |
| Two non-current items | No | Debentures converted into shares |
Practise the rule on twelve events. For each, say whether funds move, and the answer and reason follow straight away.
Pick an answer for each item. 12 items.
- A company pays ₹5,00,000 in cash for new machinery
Moves funds. Cash, a current asset, falls and a fixed asset rises. It is an application of funds.
- It pays for the machinery by issuing debentures to the seller, repayable in ten years
Does not move funds. A fixed asset rises and a long-term liability rises. No current item is touched.
- It receives a five-year bank loan of ₹10,00,000 in its bank account
Moves funds. Cash rises and a long-term liability rises. It is a source of funds.
- It repays a short-term bank overdraft out of its cash
Does not move funds. Cash and the overdraft are both current, so working capital does not change.
- It pays a dividend of ₹1,00,000 from its bank account
Moves funds. Cash falls and equity falls. It is an application of funds.
- A customer pays ₹40,000 owed for goods sold last month
Does not move funds. Cash rises and receivables fall. Both are current.
- It charges ₹20,000 of depreciation
Does not move funds. Profit and the fixed asset both fall, and no current item changes. It is added back to profit when funds from operations are worked out, since it reduced profit without using funds.
- It issues new shares and receives ₹3,00,000 in cash
Moves funds. Cash rises and equity rises. It is a source of funds.
- Debentures are converted into shares
Does not move funds. A long-term liability falls and equity rises.
- It buys ₹80,000 of stock on credit from a supplier
Does not move funds. Stock and payables both rise. Both are current.
- It sells an old machine for ₹60,000 in cash
Moves funds. Cash rises and a fixed asset falls. It is a source of funds.
- It repays ₹2,00,000 of a long-term loan in cash
Moves funds. Cash falls and a long-term liability falls. It is an application of funds.
Depreciation is the item people find odd. It is a cost, and it reduces profit, but it moves nothing in working capital. That is why funds from operations are worked out as profit plus depreciation: the profit figure was reduced by a charge that never used any funds, so it is added back.
Build one
Below is a small company's year as a statement of sources and applications. Funds from operations are profit plus depreciation. The company can also borrow on a long-term loan, spend on fixed assets and pay a dividend. Whatever remains is the change in working capital. Sources minus applications always gives that change, which is the property that makes the statement useful.
Funds from operations were ₹3,50,000 (profit plus depreciation), and the long-term loan added ₹4,00,000, so ₹7,50,000 came in. ₹6,00,000 went into fixed assets and dividends. The remaining ₹1,50,000 stayed in working capital, so current assets rose by more than current liabilities.
Try three experiments. First, raise the loan and see working capital rise: long-term money that is not spent on long-term things is left in the trade. Second, push spending on fixed assets above all the sources, and the change turns negative. A company that spends more on long-term assets than it raises over the long term must draw down its working capital, which in practice means running down cash or stock, or borrowing short term, to pay for it. This is a classic warning sign in a fund flow statement. Third, raise the depreciation. Sources rise, because the add-back rises. In a real company a higher depreciation charge would also have lowered profit by the same amount, so funds from operations would not change. Here the profit is set separately, so you are adding to it. This is the reason depreciation is a line in the statement and not a source of money.
A real company: Titan
Titan's two balance sheets, at 31 March 2024 and 31 March 2023, hold everything needed. The first step is the schedule of changes in working capital: each current asset and current liability, the change in it, and the effect on working capital. An increase in a current asset raises working capital. An increase in a current liability lowers it.
| ₹ crore | 31 Mar 2024 | 31 Mar 2023 | Effect on working capital |
|---|---|---|---|
| Current assets | |||
| Inventories | 16,874 | 14,952 | 1,922 |
| Current investments | 1,635 | 2,143 | (508) |
| Trade receivables | 937 | 908 | 29 |
| Cash and cash equivalents | 272 | 119 | 153 |
| Other bank balances | 533 | 673 | (140) |
| Current loans | 277 | 128 | 149 |
| Other current financial assets | 875 | 662 | 213 |
| Other current assets | 1,290 | 1,101 | 189 |
| Total current assets | 22,693 | 20,686 | 2,007 |
| Current liabilities | |||
| Current borrowings | 2,670 | 1,190 | (1,480) |
| Gold on loan | 4,938 | 5,090 | 152 |
| Current lease liabilities | 248 | 223 | (25) |
| Trade payables, micro and small enterprises | 166 | 139 | (27) |
| Trade payables, others | 777 | 826 | 49 |
| Other current financial liabilities | 624 | 497 | (127) |
| Other current liabilities | 3,801 | 3,365 | (436) |
| Current provisions | 81 | 118 | 37 |
| Current tax liabilities | 57 | 73 | 16 |
| Total current liabilities | 13,362 | 11,521 | (1,841) |
| Working capital (current assets less current liabilities) | 9,331 | 9,165 | 166 |
Working capital rose from ₹9,165 crore to ₹9,331 crore, an increase of ₹166 crore. That small net figure hides two large movements pulling in opposite directions. Inventories rose by ₹1,922 crore, which raises working capital. Current borrowings rose by ₹1,480 crore, which lowers it. Much of the stock build was financed by short-term borrowing, so the two nearly cancel.
The second step is the statement itself. Everything not in the schedule, which is the equity and the non-current items, becomes a source or an application. A rise in a non-current liability is a source. A rise in a non-current asset is an application. For equity, the year's total comprehensive income is a source, and dividends and treasury shares bought back are applications.
| ₹ crore | FY2023-24 |
|---|---|
| Sources of funds | |
| Total comprehensive income for the year | 3,541 |
| Add depreciation and amortisation, charged but not paid | 447 |
| Funds from operations | 3,988 |
| Share based payments and other equity movements | 46 |
| Increase in non-current borrowings | 3,139 |
| Increase in non-current lease liabilities | 307 |
| Increase in non-current provisions | 24 |
| Decrease in other non-current assets | 6 |
| Total sources | 7,510 |
| Applications of funds | |
| Dividends paid | 888 |
| Acquisition of treasury shares | 236 |
| Additions to fixed assets and right-of-use assets | 937 |
| Increase in non-current investments | 5,062 |
| Increase in other non-current loans, financial assets and tax assets | 221 |
| Total applications | 7,344 |
| Increase in working capital (sources less applications) | 166 |
The statement closes exactly on the schedule: sources of ₹7,510 crore less applications of ₹7,344 crore leaves the ₹166 crore increase in working capital. Funds from operations were ₹3,988 crore, which is total comprehensive income of ₹3,541 crore plus depreciation. Together with ₹3,139 crore of new long-term borrowing, they paid for the two biggest applications: ₹5,062 crore of additional non-current investments, and ₹937 crore of additions to fixed assets and right-of-use assets, along with the dividend of ₹888 crore and the ₹236 crore for treasury shares.
Two small notes on the figures. The line "share based payments and other equity movements" of ₹46 crore is the part of the change in equity that the printed lines do not explain, the same item the lesson on how the three statements connect showed. And the ₹937 crore of additions is larger than the ₹529 crore Titan paid for fixed assets in its cash flow statement, because a balance sheet shows an asset arriving whether or not cash was paid. Part of the ₹408 crore difference is likely to be new leased premises, which come onto the balance sheet as right-of-use assets, alongside the non-current lease liabilities that rose by ₹307 crore. The notes to the accounts would show the split, and this lesson has not read them.
Fund flow and cash flow side by side
The same year, told two ways. Compare the lines of the two statements for Titan.
| ₹ crore | FY2023-24 |
|---|---|
| Fund flow: funds from operations (total comprehensive income plus depreciation) | 3,988 |
| Cash flow: cash from operating activities | 2,030 |
| Fund flow: increase in working capital | 166 |
| Cash flow: increase in cash and cash equivalents | 153 |
| Fund flow: increase in current borrowings (inside working capital) | 1,480 |
| Cash flow: net proceeds from short-term borrowings (a financing source) | 1,480 |
| Fund flow: increase in inventories (inside working capital) | 1,922 |
| Cash flow: cash used by inventories (an operating use) | 1,922 |
Funds from operations of ₹3,988 crore look almost twice the ₹2,030 crore of cash from operating activities. The difference is the treatment of working capital. A fund flow statement keeps working capital as the thing being measured, so the stock build sits inside the result. A cash flow statement subtracts it from operating cash. Short-term borrowing shows the same effect. In the fund flow statement the ₹1,480 crore increase in current borrowings is part of the schedule. In the cash flow statement it appears as a financing source. The two net results, a ₹166 crore increase in working capital and a ₹153 crore increase in cash, happen to be close this year. They are different measures and could easily have moved apart.
| Fund flow statement | Cash flow statement | |
|---|---|---|
| What it follows | Working capital (usually) | Cash and cash equivalents |
| Built from | Two balance sheets, plus some extra information | The year's profit, the balance sheet changes and details of transactions |
| Short-term borrowing | Inside working capital | A financing source |
| Stock and receivables | Inside working capital | Deducted in the operating section |
| Main question | Did long-term money pay for long-term needs? | Where did cash come from and go? |
| Required of companies | Not as a published statement | Yes, for most companies |
On the last row: the Companies Act, 2013 lists a balance sheet, a statement of profit and loss, a cash flow statement, a statement of changes in equity and explanatory notes as a company's financial statements, though some categories of company, such as one person companies, may be relieved of the cash flow statement. A fund flow statement is not on that list. India's accounting standard AS 3, on cash flow statements, became mandatory for larger (Level I) enterprises from 1 April 2001, and Ind AS 7 covers companies that follow Ind AS. A fund flow statement remains a management and analysis tool, and a common topic in finance courses.
Sources and uses for three global companies
A fund flow statement asks where a business obtained its money during the year and how it spent it. The cash flow statements of Apple, Microsoft and Toyota can be rearranged into that question. In the table, cash from operations is the main source, and the other lines show where it went. Brackets mean cash out; the last line is the change in the company's cash balance and ties to its balance sheets.
| Latest year, millions of each currency | Apple ($) | Microsoft ($) | Toyota (¥) |
|---|---|---|---|
| Cash from operations | 111,482 | 136,162 | 3,696,934 |
| Spent on property and equipment | (12,715) | (64,551) | (1,906,811) |
| Spent on equipment leased to others | none | none | (2,996,920) |
| Other investing, net | 27,910 | (8,048) | 713,995 |
| Buybacks and dividends | (106,132) | (42,502) | (2,311,372) |
| Other financing, net (borrowing and repayment) | (14,554) | (9,197) | 2,508,608 |
| Exchange rates | 0 | 63 | (134,090) |
| Change in cash | 5,991 | 11,927 | (429,656) |
Every column ends on the real change in cash, so the arrangement keeps the facts and changes the order. The three companies' choices are visible at a glance.
Reading the spending
Apple spent most of its operating cash on shareholders: $106,132 million in buybacks and dividends. Investing was a net source, since the other investing items brought in $27,910 million, which is net sales and maturities of securities, and other financing took out a further $14,554 million.
Microsoft put the largest share of its operating cash back into property and equipment, with $42,502 million going to shareholders. The other investing items, mainly acquisitions and investments, used $8,048 million, and other financing used $9,197 million.
Toyota spent heavily on equipment to lease (¥2,996,920 million) and returned ¥2,311,372 million to shareholders. To cover this it brought in ¥2,508,608 million of net borrowing and other financing, and the other investing lines were a net source of ¥713,995 million, largely from sales of leased equipment. It is a business funded, in part, by outside lenders, which is normal for a company with a finance arm.
Where this statement fits today
Neither US GAAP nor IFRS requires a fund flow statement. Both require the cash flow statement, which is the audited statement, and it replaced earlier "statements of changes in financial position" in which funds were defined as working capital or as cash and equivalents. The fund flow view continues as an analyst's tool, as in the table above, because it reorders the facts to show which source of money paid for which use. It is still taught in many accounting courses, and the question it asks is the same: what are the sources, what are the uses, and does the total match the change in the balance sheet.
The test of any such statement is the last line. If sources less uses does not equal the change in cash, something has been left out, which is what the check on the table confirms for each company.
Common mistakes
Treating the fund flow statement as a cash statement
Only when funds are defined as cash. In the usual working-capital version, a rise in stock or receivables is not a use of funds, because it stays inside working capital.
Forgetting to add back depreciation
Profit has already had depreciation subtracted. Funds from operations add it back, because depreciation does not use up funds. Forgetting this understates the sources.
Counting a movement inside working capital as a source or application
Paying a supplier from cash or collecting from a customer moves no funds. They belong in the schedule of changes in working capital only.
Mixing up the sign of a change in a liability
An increase in a current liability lowers working capital. An increase in a non-current liability is a source of funds. The same direction has opposite effects.
Expecting sources and applications to match without the schedule
They differ by exactly the change in working capital. If they do not differ by that amount, a line has been missed or a sign flipped.
Try it yourself
1. A company's current assets were ₹100 lakh last year and ₹120 lakh this year. Its current liabilities were ₹60 lakh last year and ₹70 lakh this year. What was the change in working capital?
Show the working
Last year: 100 − 60 = ₹40 lakh. This year: 120 − 70 = ₹50 lakh. Working capital rose by ₹10 lakh.
2. In a year, funds from operations were ₹8 lakh and the company raised a long-term loan of ₹10 lakh. It bought fixed assets for ₹12 lakh and paid a dividend of ₹2 lakh. What was the change in working capital?
Show the working
Sources are 8 + 10 = ₹18 lakh. Applications are 12 + 2 = ₹14 lakh. The difference, ₹4 lakh, is an increase in working capital.
3. A company pays ₹50,000 to a supplier from its bank account. Does this move funds?
Show the working
No. Cash and payables are both current, so working capital is unchanged. It would show up as a change inside the schedule, not as a source or application.
4. Titan's current borrowings rose by ₹1,480 crore, yet the fund flow statement above does not list them as a source. Why?
Show the working
They are a current liability, so they sit in the schedule of changes in working capital, where the increase lowers working capital by ₹1,480 crore. The cash flow statement, by contrast, treats short-term borrowing as a financing source.
Where this is used
- A finance manager checks whether a plan to build a new plant can be paid for from long-term money, or would squeeze working capital.
- A lender reviews whether a company has been using short-term borrowing to pay for long-term assets, which a fund flow statement shows as a falling working capital.
- A student of commerce or management prepares the statement from two balance sheets, which trains the habit of tracing every balance sheet change to its cause.
- An analyst reading a balance sheet quickly can sketch sources and applications to see where the long-term money went.
Key terms
- Funds
- In this lesson, working capital: current assets less current liabilities.
- Fund flow statement
- A statement of the sources and applications of funds between two balance sheet dates.
- Source of funds
- A transaction that raises funds: profit from trading, depreciation added back, new long-term borrowing, share issues, sale of fixed assets.
- Application of funds
- A transaction that uses funds: buying fixed assets or investments, paying dividends, repaying long-term loans.
- Funds from operations
- Profit with non-fund charges such as depreciation added back.
- Schedule of changes in working capital
- The list of each current asset and liability, its change, and the effect on working capital.
- Non-current item
- An asset or liability not expected to be realised or settled within a year.
Questions people ask
Is a fund flow statement still required?
Not as part of a company's published financial statements. The Companies Act lists the cash flow statement, not the fund flow statement. It remains a widely taught tool and a useful way of reading two balance sheets.
Can working capital rise while cash falls?
Yes. If a company builds up stock or receivables, working capital rises, and cash may fall as it pays for them. The cash flow statement shows the second. The fund flow statement shows the first.
Why is depreciation added back in funds from operations?
Depreciation reduced profit but used no funds. Adding it back undoes that deduction so that the sources show what the trade itself provided.
Which one should I use?
For the question "can we pay our bills", the cash flow statement. For the question "has long-term money paid for long-term needs", the fund flow statement. Many analysts look at both.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of both balance sheets and the total comprehensive income.
- Titan Company Limited, audited results with statements of cash flows for the year ended 31 March 2024, filed with BSE. Source of dividends, treasury shares, cash flow and borrowing lines.
- gac.ac.in, Fund flow statement, a college course page, for the meanings of funds and the rule on when funds move.
- eFinanceManagement, Fund flow statement, for the standard sources and applications and the definition of funds from operations.
- TaxGuru, Financial statements under the Companies Act, 2013, for the list of statements a company must prepare.
- Patron Accounting, AS 3 Cash Flow Statements, for the date AS 3 became mandatory for Level I enterprises.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: the schedule's changes add to the change in working capital, and the sources and applications were built line by line from the two balance sheets and the verified equity roll. They close on that same ₹166 crore. The calculator was tested against separate arithmetic across thousands of slider combinations.