Difference Between Cash Flow and Fund Flow

India hosts almost 6.38 MSME businesses as reported by India Brand Equity Foundation. These small-scale businesses, however, suffer the acute shortage of a regular cash flow, leading to poor business growth. A leading survey reported by news media showed that only 42% of Indian small businesses could secure funding for their companies, a sharp contraction from the earlier numbers.

You can read in detail about what an MSME is and the importance they have in strengthening the Indian economy.

This is where the role of cash flow and fund flow comes in. The concept of these two will be explained in detail in this blog but in a simpler manner. Also, the difference between cash flow and fund flow will be taken up as we progress in our discussion. Let’s first break down the concepts.

What is Cash Flow?

Cash flow means the inflow and outflow of cash within a business during a specified period. This is more of a financial statement that shows the inflow and outflow of cash of a company and is maintained in the books of accounts periodically. The main importance of this is to ascertain the liquidity position of a company, such as assessing whether the company can pay out the bills or even reinvest in another business.

Major Elements of Cash Flow

• Operating Cash Flow

Operating cash flow is derived from the business's core activities. Every company collects cash inflow through its core operations and uses this cash to disburse payments to suppliers and employees. When there is a positive operating cash flow, it means a company can be independent of any outsourcing and still maintain its operations. Operating cash flow examples include income tax pay, salary and wages paid, and interest payments.

• Investing Cash Flow

A company usually invests in securities, and purchases bonds, and hedge funds for the long term. The cash utilised in these kinds of investment activities is better known as investing cash flow. This concept is highly important as a negative cash flow will eventually lead to a lower capacity of the company to invest for the long-term, hence lower capital accumulation. A few examples of cash flow from investing activities will be sales and receiving proceeds from marketable securities.

• Financing Cash Flow

Every company engages in various financial activities, such as purchase and sale of equity, issuance and repayment of debt and a few more. Keeping a record of cash flow from these financing activities allows the stakeholders to understand its major operations and expansions. This concept later helps to understand the main difference between cash flow and fund flow.

What is Fund Flow?

Fund flow is usually described as the changes in working capital arising from various financial activities. Here comes the cash flow and fund flow difference, as while cash flow defines the liquid position of the company, fund flow defines the working capital position. The long-term investments and changes in the conditions of working capital are directly assessed by fund flow. While making long-term strategic planning, firms need to measure the fund flow first.

You may be interested to know more about raising capital funds for your startup business.

Major Elements of Fund Flow

• Sources of Fund Flow

There are various sources of funds to measure fund flow, such as issuing shares and debentures, long-term loans, and funds raised from equity. These sources show the manner of fund management by a company for its operations and expansions.

• Uses of Fund Flow

Fund flow detects the exact sources of fund flow and fund outlays such as new assets acquisition, debt settlement and venture investment. This allows a company to directly understand the areas where maximum investment is undertaken. Moreover, fund flow helps firms record major changes in working capital and assets, which helps for better strategisation.

Cash Flow vs Fund Flow: Key Differences

Both cash flow and fund flow are crucial in understanding the financial position of a company, although they have major differences. The main difference between cash flow and fund flow is given below:

Advantages of Cash Flow Statement

There are a number of benefits that maintaining a cash flow statement provides. To understand the difference between a cash flow statement and a fund flow statement, the benefits of cash flow and fund flow first need to be studied coercively.

Real-Time Financial Health

It gives a snapshot of a company's liquidity in real-time, which enables management to decide on optimising business areas where more strategic decisions are needed. Moreover, the liquidity position of the business is appropriately measured by a cash flow statement.

Cash Flow Issues Detection

The majority of small businesses in India suffer from insufficient cash flow. This is because cash flow can be easily termed as one of the vital business metrics. Major startups have not been able to grow because of irregular cash flow, so identifying the main areas of cash flow deficiency can enable companies to take corrective action in due time.

Providing a real snapshot

The accrual method of accounting takes into account only the income and expenses, irrespective of the surplus and deficiency in the cash fund. This accrual method does not attach much significance to the liquidity position of a firm, such as not recording cash dividends. One of the major advantages of cash flow is that it duly records this to reflect the real financial position of the firm.

Disadvantages of Cash Flow Statement

Here are some of the major disadvantages of a cash flow statement:

Short-Term Emphasis

Firms require a history of both short-term and long-term cash flows, which is not reflected in the case of a cash flow statement. Because it only shows transactions for a limited time, a cash flow statement is not considered to showcase only the historical data.

Omits Non-Cash Transactions

A few other disadvantages of a cash flow statement are that it does not consider non-cash transactions and treats them off the record. Transactions like depreciation or amortization, which impact commercial profitability to a good extent, are not recorded in a cash flow statement. A cash flow statement considers only cash-based transactions, which makes it highly limited to reflect the actual financial position of the company.

Get to know in detail about financial reporting of a company in simple terms.

Advantages of Fund Flow Statement

Here is a list of all the advantages of a fund flow statement:

Understanding the credit position of a firm

A fund flow statement provides the actual source of all funds and capital investments, hence helping the firm to understand the credit position. Because a fund flow statement measures the current liabilities of a firm, it becomes easy to evaluate the credit condition of the firm in one go. By knowing the credit score, companies can make strategic decisions for better fund management.

Long-Term Planning

The difference between cash flow and fund flow is that cash flow focuses more on historical transactions, while fund flow emphasizes current changes in working capital. The fund flow statement helps in long-run financial planning by showing patterns in sources of funds and applications over a period.

Helps in strategising for long-term

A firm cannot rely solely on the balance sheet and the cash flow statement for taking crucial financial decisions. A fund flow statement shows the long-term borrowings in terms of bank overdraft, marketable securities borrowing and long-term creditors. This helps the firm to devise a sound financial plan for the future.

Disadvantages of Fund Flow Statement

Earlier when we reviewed the major disadvantages of cash flow statement, we discussed a few points that lower the limit of the foresight of the firm in planning better. A fund flow statement although resolves these limitations, is yet lined up with a few issues. Let’s walk through the major demerits of fund flow.

Limited financial statement

Apart from fund flow, a business majorly uses a balance sheet and a profit and loss statement to have a strong analytical understanding of the business. This implies that a fund flow statement cannot be a solo financial statement that a business can rely on, it only provides records of working capital changes.

Less Immediate Insight

It might not yield immediate information about liquidity concerns since it lacks a record of liquid cash movement. A fund flow statement records only capital changes, which makes it a highly limited statement that a firm can use for a true financial assessment.

Cannot reflect current liquidity position

One of the greatest shortcomings of a fund flow statement is that it cannot offer insight into the current liquidity position of the firm. During our discussion of cash flow vs fund flow concepts, we found out that the fund flow statement is mostly concerned with the movement of capital funds. This is a demerit as it ignores the daily cash flow condition, which is necessary for a seamless business operation.

Conclusion

The distinction between cash flow and fund flow is critical for companies, particularly startups and SMEs, in India. While cash flow offers information on current liquidity and operational effectiveness, fund flow presents a complete picture of financial health and long-term strategy. Both statements are critical to proper financial management, allowing companies to make decision-making decisions that spur growth and sustainability.