Difference Between Cash Flow Analysis And Funds Flow Analysis
Following are the points of difference between a Cash Flow Analysis and a Funds analysis.
- A cash flow statement is concerned only with the change in cash position while a funds flow analysis is concerned with changed in working capital position between two balance sheet dates. Cash is only one of the constituents of working capital besides several other constituents such as inventories, accounts receivable, prepaid expenses.
- A cash flow statement is merely a record of cash receipts and disbursements. Of course, it is valuable in its own way but if fails to bring to light many important changes involving he 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 are easily convertible into cash.
- Cash flow analysis is more useful to the management as a tool of financial analysis in short period as compared to funds flow analysis. It has rightly been said that shorter the period covered by the analysis, greater is the importance of cash flow analysis. For example, if it is to be found out whether the business can meet it obligations maturing after 10 years from now, a good estimate can be made about 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 months 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.
- 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 necessarily result in “inflow of cash”. Thus, a sound funds position does not necessarily mean a sound position but a sound cash position generally means a sound funds position.
- 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 verse. 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 of term “funds” in a very narrow sense of ‘cash’ only. In such an event the two terms ‘Funds’ and ‘Cash’ will have synonymous meaning.
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