FUND FLOW STATEMENT

MEANING

1 STEP: SUPPOSE YOU WANT TO OPEN A BUSINESS WITH A CAPITAL OF 100 CRORES….

CAN YOU PREPARE YOUR BALANCE SHEET?????????

LIABITIES AMOUNT CURRENT ASSETS AMOUNT Rs. Crore)CAPITAL 100 FIXED ASSETS 80

CURRENT ASSETS 20

TOTAL 100 100

2ND STEP:CAN YOU PREPARE FUND FLOW STATEMENT WITH ABOVE INFORMATION?????????FUND FLOW STATEMENTSOURCES OF FUNDSCAPITAL 100TOTAL SOURCES OF FUNDS (A) 100USE OF FUNDSFIXED ASSETS 80TOTAL USES OF FUNDS (B) 80SURPLUS (A-B) 20

3RD STEP:CAN YOU PREPARE YOUR BALANCE SHEET?????????LIABITIES AMOUNT CURRENT ASSETS AMOUNT Rs. Crore)CAPITAL 100 FIXED ASSETS 80

CURRENT ASSETSRAW MATERIAL 15CASH & BANK 5

TOTAL 100 100

4TH STEP: NOW TELL ME WHAT YOU WILL DO WITH YOUR CURRENT ASSETS???

FUND FLOW IS A STATEMENT WHICH SHOWS INFLOW & OUTFLOWS OF LONG TERMS FUNDS FROM WHERE FUNDS HAVE BEEN GENERATED AND WHERE THEY ARE USED.

CAPITAL WE BRINGS INTO BUSINESS… WE WILL BUY 80 CRORES OF FIXED ASSTEST AND 20 CRORES WILL RATINED IN CURRENT ASSETS

IN FUND FLOW STATEMENT WE WILL SHOW LONG TERM SOURCES OF FUNDS AND LONG TERM USE OF FUNDS.

IT MEANS YOU BOUGHT 100 CRORE CAPITAL OUT OF WHICH 80 CRORES ( 80%) YOU USED IN PURCHASING FIXED ASSETS AND RS.20 CRORES (20%) USED FOR CREATING CURRENT ASSETS ( AS PER BALANCE SHEET IN STEP 1)… IT MEANS YOUR CURRENT ASSETS IS FUNDED BY YOUR OWN MONEY.

NOW YOU HAVE RS. 20 CRORE IN YOUR CURRENT ASSETS… SUPPOSE MAY BE 15 CRORE OF RAW MATERIAL AND 5 CRORE IN CASH & BANK BALANCE

SUPPOSE YOU USED 13 OF RMS AND 4 CRORES OF CASH IN PRODUCTION .. SO YOUR RMS BALANCE WILL BE 2 CRORE AND CASH BALANCE WILL BECOME RS.1 CRORE

CAN YOU PREPARE YOUR PROFIT AND LOSS STAMENT NOW ???INCOME STATEMENT

INCOME 20

EXPENSES 17

TOTAL 3

4TH STEP: NOW ASSUME THAT YOUR 60% SALE WAS ON CREDIT AND 40% ON CASH

IT MEANS YOU HAVE DEBOTRS FOR RS. 12 CRORES NOW AS SALE WAS MADE 60% ON CREDIT

CAN YOU PREPARE YOUR BALANCE SHEET?????????LIABITIES AMOUNT CURRENT ASSETS AMOUNT Rs. Crore)CAPITAL 100 FIXED ASSETS 80

CURRENT ASSETS

3 RAW MATERIAL 2DEBTORS 12CASH & BANK 9

TOTAL 103 103

TOTAL SOURCES OF FUNDS NOWCAPTIAL 100RETAINED PROFIT 3

103

NOTE:

5TH STEP: NOW CAN YOU PREPARE FUND FLOW STAMENT AS PER ABOVE GIVEN INFORMATION???FUND FLOW STATEMENTSOURCES OF FUNDSCAPITAL 100FUND FROM OPERATIONS 3TOTAL SOURCES OF FUNDS (A) 103USE OF FUNDSFIXED ASSETS 80

YOUR TOTLA COST OF PRODUCTION IS RS. 17 CRORE ( 13 CRORE (RMS)+ 4 CRORES ( CASH & BANK)

SUPPOSE YOU SELL YOUR PRODUCTION FOR RS. 20 CRORES SO YOUR PROFIT IS RS. 3 CRORES ( 20 CRORES (SALES)- 17 CRORES (PRODUCTION)

CREDIT SALE FOR RS. 12 CRORE (60% OF 20 CRORE) AND CASH SALE FOR RS.8 CRORE (40% OF 20 CRORE)

NOW WE HAVE DEBTORS OF RS. 12 CRORE, PROFIT OF RS. 3 CRORE, RMS OF RS. 2 CRORES AND CASH BALANCE OF RS.9 CRORES ( 1 CRORE ( 5-4(USED FOR PRODUCTION) + 8 CRORE (CASH SALES))

P& L ( RETAINED PROFIT)

IF CAPITAL IS LONG TERM FUND THEN RETAINED PROFIT IS ALSO LONG TERM FUND AS IT PAYABLE TO OWNERS ONLY.

TOTAL USES OF FUNDS (B) 80SURPLUS (A-B) 23

6TH STEP: NOW SUPPOSE YOU WANT TO BUY ANOTHER PLANT & MACHIENERY FOR RS. 50 CRORE.

LETS GO AHEAD..NOW YOU ARE GOING TO BRING FRESH CAPITAL OF RS. 10 CRORE FOR THISNOW QUESTION IS THAT ONLY 10 CRORES BUT YOUR REQUIREMENT IS RS.50 CRORE??

HENCE THE REQUIREMENT IS FOR RS. 31 CRORE ( RS. 50 CRORE - RS. 19 CRORE)

NOTE:CAN YOU PREPARE YOUR BALANCE SHEET?????????LIABITIES AMOUNT CURRENT ASSETS AMOUNT Rs. Crore)CAPITAL 100 FIXED ASSETS 130

10 CURRENT ASSETS

31

3 RAW MATERIAL 2DEBTORS 12CASH & BANK 0

TOTAL 144 144

7TH STEP:CURRENT YEAR YOU WILL REPEAT THE SAME PLUS ADDITIONAL SALES

PARTICULARS TOTALSALES 20 50 70

13 38 -51

FOR THIS YOU HAVE TO INCREASE YOUR SALES BY 50 CRORES AND PROFIT BY ANOTHER RS. 5 CRORES. IT SOUND VERY ILLOGICAL….BUT REMEMBER ONE THING FUND FLOW WILL THROW ALL ILLOGICAL FINANCIAL STUFF DONE BY THE BUSINESS ENTITIES

BUT DON’T FORGET YOU HAD CASH BALANCE OF RS. 9 CRORE…. SO YOU HAVE FUND OF RS. 19 CRORE( RS.10 CRORE( FRESH CAPITAL)+ RS.9 CRORE 9 CASH BALANCE)

YOU CAN NOT USE SHORT TERM BORROWING FOR AQUIRING PLANT AND MACHIENRY. BUT SHORT TERM BORROWING GOING TO GIVE YOU CASH AND YOU MAY USE THAT AND FIND

SOME LONG TERM FUNDS LATER AS SUBSTITUTE… ( I KNOW ITS CRIMINAL MISTAKE… DON’T WORRY GO AHEAD)

ADDITIONAL CAPITAL

SHORT TERM BORROWING

P& L ( RETAINED PROFIT)

( SHORT TERM BORROWING + CASH+ ADDITION CAPITAL USED IN AQUIRING PLANT AND MACHINERY)

LAST YEAR YOUR SALES WERE RS. 20 CRORE … FOR THAT YOU USED RMS FOR RS. 13 CRORE AND OTHER EXPENSES FOR RS. 4 CRORE FROM CASH

WITH EXISTING CAPACITY

WITH NEW CAPACITY

RM CONSUMED

4 7 -11

PROFIT 3 5 8

A

BC NOW FIND OUT YOUR CASH BALANCE

OPENDING BALANCE 0ADD: 14

CASH GENERATION 14

DRAW MATERIAL REQUIREMENT 51LESS: RAW STOCK AVAILABLE 2RAW MATERIAL TO BE PURCHASE 49

14

35

E NOW YOU HAVE FOLLOWING BALANCECASH BALANCE 0OTHER EXPENSE -11 PAYABLE

RAW MATERIAL STOCK 0 CONSUME ALL RM

DEBTORS 68CAN YOU PREPARE YOUR BALANCE SHEET?????????LIABITIES AMOUNT CURRENT ASSETS AMOUNT Rs. Crore)CAPITAL 100 FIXED ASSETS 130

10 CURRENT ASSETS

31

11 RAW MATERIAL 0

OTHER EXPENSES

SO IT MEANS YOU ARE GOING TO CONSUME RMS OF RS. 51 CRORE… BUT YOUR BALANCE SHEET SAYS YOU HAVE BALANCE OF RS. 2 CRORES WORTH RMS.NOW YOU HAVE TO PURCHASE RS. 49 CRORE ( RS. 51 CRORE - RS 2 CRORE) OF RAW MATERIALS.. AND YOU DONT HAVE CASH BALANCE ...AND HAVE TO DEPEND ON YOUR CASH SALES FOR THIS. SO, ASCERTAIN CASH INFLOWS FROM SALES

YOUR CREDIT SALES ARE GOING TO INCRESES TO REMAIN COMPETITIVE IN MARKET. YOUR TOTAL SALES ARE RS.70 CRORE OUT OF WHICH 80% IS ON CREDIT SALES AND 20% ON CASH SALES. SO YOU WILL HAVE DEBTORS OF 68 CRORES ( 56 CRORE(80% OF 70 CRORE) + 12 CRORE (AS PER LAST BALANCE SHEET)

CASH SALES (20% OF 70 CRORE)

MAKE USE OF CASH GENERATED TO PURCHASE GOODS AND CALCULATE HOW MUCH SHOULD BE PURCHASE ON CREDIT ????????

LESS: CASH PURCHASE WITH CASH GENERATED

RAW PURCHASE TO BE MADE IN PURCHASE CREDIT

(HOW YOU WILL IF YOU DON’T HAVE MONEY IN CASH & BANK). THOSE EXPENSES WILL REMAIN LAIBLITY TILL THEY PAID OFF.

( 56 CRORE OF 80% OF 70 CRORE CREDIT SALES)+OPENING

DEBOTRS AS PER BALANCE SHEET

ADDITIONAL CAPITAL

BANK OVERDRAFT

P& L ( RETAINED PROFIT)

35 DEBTORS 68

11 CASH & BANK 0

TOTAL 198 198

CAN YOU PREPARE 2 YEARS BALANCE SHEET AND P&L AT ONE PLACE?????????

LIABITIES CURRENT ASSETS AMOUNT (C.Y) AMOUNT (P.Y)CAPITAL 100 100 FIXED ASSETS 130 80

10 0 CURRENT ASSETS 0 0

31 0 0 0

11 3 RAW MATERIAL 0 2

35 0 DEBTORS 68 12

11 0 CASH & BANK 0 9

TOTAL 198 103 198 103

INCOME STATEMENTSALES 70

-51

-11PROFIT 8

8TH STEP: IN THIS ENTIRE EXERCISE WE DO NOT TOUCH DEPRECIATION. LET DO NOT TOUCH THAT LET TRY TO PREPARE YOUR FUND FLOW STATEMENT NOW

A WHAT ARE THE LONG TERM SOURCE FOR COMPANY NOW??

ANS.B WHAT YOUR LONG TERM USES??ANS. IT IS RS. 50 CRORES OF PLANT AND MACHINERY

HERE COMES THE CATCH GO AND PREPARE YOUR FUND FLOW STATEMENT??FUND FLOW STATEMENTSOURCES OF FUNDSCAPITAL 10

SUNDRY CREDITORS

EXPENSES PAYABLE

AMOUNT (C.Y)

AMOUNT (P.Y)

ADDITIONAL CAPITAL

BANK OVERDRAFT

P& L ( RETAINED PROFIT)

SUNDRY CREDITORS

EXPENSES PAYABLE

RM CONSUMPTION

OTHER EXPESES

ADDITIONAL CAPITAL OF RS. 10 AND FUND FROM OPERATION RS.8.. SO LONG TERM FUND IS RS. 18

FUND FROM OPERATION 8TOTAL SOURCES OF FUNDS (A) 18USE OF FUNDSFIXED ASSETS 50TOTAL USES OF FUNDS (B) 50SURPLUS (A-B) -32

NOTE YOUR LONG TERMS SOURCE SAYS THAT YOU HAD DEFICIT OF RS. 32 CRORES

LET ELABORATE THIS:

LET ME TABULATE THAT

PARTICUALRS CURRENT YEARCURRENT ASSETS 23 68CURRENT LIABLITY 0 77WORKING CAPITAL 23 -9

REDUCTION IN WORKING CAPITAL 32

OTHERWORDS,

FFS SHOW THAT SOLVENCY OF YOUR BUSINESS IS ALWAYS UNDER PRESSURE AND THREAT

FFS SHOW THAT YOU ARE VERY POOR IN WORKING CAPITAL MANAGEMENT

REMARKS:

IT MEANS YOU HAD USE SOME OTHER FUND FOR CREATING LONG TERM ASSETS. YOU HAD USED THE FUND FOR WORKING CAPITAL PURPOSE

LAST YEAR YOUR WORKING CAPITAL REQUIREMENT WAS RS. 23 CRORES. THAT WAS FUNDED FULLY BY OWN FUND.

BUT CURRENT YEAR WORKING CAPITAL FUND REQUIREMENT WAS RS. 68 CRORES.(I.E CURENT ASSETS)+ BUT AGAINST THIS YOU HAD CURRENT LIABLITY OF RS. 77 CRORE ( BANK OVERDARFT+ OTHER EXPENSES+ CREDITORS). IT MEANS YOU HAD NEGATIVE WORKING CAPITAL

PREVOIUS YEAR

( PREVIOUS YEAR - CURRENT YEAR)

YOU HAVE USED REDUCTION IN WORKING CAPITAL TO FUND FIXED ASSET CREATION AND THIS AMOUNT REVEALED FROM FUND FLOW STATEMENT

YOU HAVE ATTEMPTED TO CREATE LONG TERM ASSET TO TUNE OF RS.50 CRS. BY ARRANGING LONG TERM FUND OF JUST RS. 18 CRS AND RELYING PREDOMINATY OF SHORT TERM FUNDS OF RS. 32 CRORES

FFS SHOW THAT YOU WANT TO RUN BUSINESS WITH OTHER FUNDS, SPECIALLY FUNDS WHICH CAN PUT LOTS OF PRESSURES ON LIQUIDITY OF YOUR BUSINESS

FFS SHOW THAT YOU WANT TO CREATE ASSETS EVEN BEFORE YOU STABLISE IN YOUR OPERATIONS

FFS SHOW THAT YOU HAVE CHEATED YOUR BANKERS, BECAUSE YOU HAVE AVAILED CASH CREDIT BUT IN TURN USED IT FOR CREATING FIXED ASSETS

FFS IS A VERY DANGEROUS MASTER .. IF YOUR ACTIVITIES ARE MONSTRUS, ILLOGICAL,DETRIMENTAL, YOU HAVE TO BE CAUSIOUS ABOUT THIS GUY-MR. FUND FLOW STATEMENT.. HE IS THERE TO REVEAL YOU WHAT YOU DO???