While the funds flow statement is less well known than the cash flow statement, it plays an important role in documenting your company’s finances. The funds flow statement shows how your business is financing itself, where its capital is being used, and what those choices reveal about your operations. Below, we’ll explain how to read and prepare a funds flow statement and how to make decisions based on this important document.

What’s in this article?

• What is a funds flow statement and why is it important?
  
• How is a funds flow statement different from a cash flow statement?
  
• What’s included in a funds flow statement?
  
• How do businesses prepare a funds flow statement?
  

What is a funds flow statement and why is it important?

A funds flow statement tracks how money moves through a business over a defined period of time. It maps where funds came from (sources of capital) and where those funds went (uses of capital).

Unlike a profit and loss statement, which reports earnings, or a balance sheet, which captures funds at a single point in time, the funds flow statement focuses on the movement of funds. It explains how and why the company’s working capital, which is the difference between current assets and liabilities, shifted between two dates. When funds are “used,” it means they were spent (e.g., by increasing inventory or paying off debt). When funds are “generated,” it means working capital was freed up (e.g., by tightening receivables or raising new financing).

The funds flow statement will track shifts that can’t be explained by other statements, such as noncash movements and structural rebalances in how the company is financing its operations. A balance sheet might show that inventory increased and cash decreased, but it won’t explain that, for instance, cash was used to purchase that inventory. A funds flow statement will include that information.

A funds flow statement can answer the following questions:

• How is the company funding its operations—through internal profits or by tapping external capital?

• Are working capital levels rising sustainably or are they creating cash strain?

• Are recent business decisions (e.g., expansion, repayment of long-term debt) putting pressure on liquidity?

Finance teams, operators, and investors use funds flow statements to see whether a company’s operations are generating enough internal resources to fund growth or whether it’s relying too heavily on loans or equity. These statements can reveal working capital bottlenecks, such as high receivables and overstocked inventory, and can give early signals about the sustainability of major decisions. Executives and finance leaders use this type of statement to spot shifts in the company’s financial structure before they impact the cash position.

How is a funds flow statement different from a cash flow statement?

Funds flow statements and cash flow statements tell different stories. A funds flow statement looks at how a company’s overall financial position shifts over time: where resources came from, where they went, and how those movements changed working capital. A cash flow statement focuses only on what happened to cash.

Here’s how they differ.

Content

A cash flow statement tracks only the movements of cash and cash equivalents. For example, if accounts receivable increased, that wouldn’t show up in the cash flow statement as no money moved.

A funds flow statement looks at changes in “funds,” typically defined as working capital (current assets minus current liabilities). It includes both cash and noncash changes. Funds flow statements factor in accruals that affect the company’s resources, even if no cash has changed hands yet. These include credit sales, unpaid expenses, and inventory buildups.

Structure

Cash flow statements follow a standard format: cash from operating, investing, and financing activities.

Funds flow statements are structured more simply: a list of sources of funds and uses of funds during a certain time period. The funds flow statement focuses on the financial outcomes of decisions, such as where resources were raised and how they were deployed, without sorting them by activity type.

Time horizon and use

Cash flow statements help you manage short-term liquidity. They answer questions such as the following:

• Can the business meet its obligations this quarter?

• How much cash did it burn or generate?

Funds flow statements take a wider view. They’re designed for analyzing longer-term financial shifts, such as how financing, operations, and investment decisions reshape the business’s capital structure and working capital over time.

The funds flow statement is more of a planning tool, while the cash flow statement is a tactical tool.

Accounting requirements

Cash flow statements are required by both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Every publicly reporting company has to produce one.

Funds flow statements typically aren’t required in official filings. They are used mainly for internal analysis or management reporting. You won’t see them in public annual reports, but investors and finance teams often create them to better understand the business’s capital flows and working capital strategy.

What’s included in a funds flow statement?

The funds flow statement consists of two parts:

• Sources of funds

• Uses of funds

This gives you a full picture of how the company’s resources moved over a specific time period. Here’s how each part works.

Sources of funds

These are inflows, the areas from which the company got its capital during the period. Typical sources include the following:

• Equity raised or long-term debt issued: New shares, bonds, or loans count as fresh inflows. If a business raised equity or took on long-term debt, it brought in new funds. These funds expand the capital base, often to fund growth.

• Sale of fixed assets or investments: Proceeds from selling long-term assets such as equipment, real estate, and financial investments free up cash. This is a valid source of funds, but generally not one that a business can rely on repeatedly.

• Funds from operations: This is what the company generates internally. It starts with net profit but adjusts for noncash expenses, such as depreciation, and any nonoperating gains or losses. A healthy business should show operations as a major source of funds.

• Decrease in working capital: If current assets drop or current liabilities grow, working capital decreases. That generally frees up funds.

Together, these inflows make up the company’s sources of funds for the period.

Uses of funds

These are outflows, the areas where the company spent or allocated its capital. Common uses include the following:

• Capital expenditures: Buying new equipment, property, or long-term assets shows up as a use of funds. These investments often signal growth, but they tie up capital that can’t be used elsewhere in the short term.

• Repayment of long-term debt: Paying down loans, bonds, or other obligations pulls cash out of the business. This reduces financial risk but drains available resources.

• Dividends and distributions: Paying shareholders, whether through dividends or buybacks, reduces funds inside the company. These are healthy signs of profitability when they’re sustainable, but they still count as uses.

• Increase in working capital: When current assets grow faster than current liabilities, that ties up more cash in operations. This is listed as a use of funds, even if no “spending” happened in the traditional sense.

As with the sources, all these uses are tallied up to show where funds were allocated.

How do businesses prepare a funds flow statement?

To prepare a funds flow statement, start by lining up the balance sheets. You’re comparing the company’s position at the beginning and end of a period, usually the start and end of the fiscal year. Go line by line through the balance sheets and ask what changed.

If you see long-term debt increasing, that means the company brought in funds, maybe through a loan or bond issuance. If fixed assets, such as equipment and buildings, increase, that likely means the business has spent money to invest in growth.

Next, look at working capital: how much cash got tied up (or freed up) in the day-to-day mechanics of running the business (e.g., inventory, receivables, payables). Calculate how much working capital decreased or increased over the period.

Next, figure out how much was generated internally. This is your “funds from operations” figure. Start with net income, then:

• Add back noncash expenses such as depreciation

• Subtract nonoperating gains such as profits from selling an old asset

What you’re left with is the real contribution from business operations—the money the company made available to fund itself. If this number is low or negative, even when net income looks fine, that’s a sign that cash is getting absorbed somewhere else.

Finally, put everything together.

For inflows, include:

• The adjusted figure from operations

• Any capital raised (equity or debt)

• Anything the company sold off, such as equipment, property, and investments

• Any decrease in working capital

• The total of all the above

Each item gets a line. Together, the inflows show how the business fueled itself over the period.

For outflows, include:

• What the business bought, such as new machinery, real estate, and major investments

• Any debt it paid down

• Dividends or share buybacks

• Any increase in working capital

• The total of all the above

The final statement should answer the following questions:

• Was the business able to fund itself from operations or did it rely on outside capital?

• Did it reinvest or return money to shareholders?

• Did working capital grow in ways that make sense or that should raise concerns?