CHAPTER-I

 INTRODUCTION TO THE TOPIC OF STUDY

 NEED FOR THE STUDY
 SCOPE OF THE STUDY
 OBJECTIVES OF THE STUDY
 METHODOLOGY
 LIMITATIONS OF THE STUDY
 INTRODUCTION

Finance is one of the basic foundations of all kinds of economic activities. It is the master key
which provides access to all the sources for being employed in manufacturing and merchandising
activities. It has rightly being said that business needs money to make more money. However it is also
true that money generate more money. Only when it is properly managed. Hence, efficient
management of every business enterprise is closely linked with the efficient management of its
finance. Financing of a firm means providing money for investment in the form of fixed assets and also
in the form of working capital for day to day operations.

Business finance mainly involves, rising of funds and thus effective utilization keeping in view
the overall objective of the firm. This requires great caution and wisdom on part of the management.
The management makes use of various financial techniques, devices etc for administering the financial
affairs of the firm in most efficient way.

Financial management, as an integral part of overall management is not a totally independent

area. It draws heavily on related disciplines and field of study, such as Economics, Accounting there
disciplines are in related, there are key references among them.

Financial management refers to its relationship with the closely related fields, its function,
scope and objectives. Financial as academic discipline as under gone fundamental changes in its scope
and coverage. In the yearly years of its evolution it was treated synonymously with the rising of funds.
In the current literature pertaining to financial management in addition to procurement of funds
efficient use of resources is universally recognized.
MEANING OF FINANCIAL STATEMENT ANALYSIS:

A firm communicates financial information to the users through financial statements and
reports. Financial statements contain summarized information of the firm’s financial affairs, organized
systematically. They are the means to present the firm’s financial situation to the users. Preparation
of the financial statements is the responsibility of top the management.

 Funds flow statement.

 Cash flow statement.

 Comparative statement.

 Common size statement.

 Ratio analysis.

 Trend analysis.

FUNDS FLOW STATEMENT

A fund flow statement is a summary of a firm’s inflow and out flow of funds. It tells us from
where funds have come and where funds have gone. Found flows statement can indicate whether
sourcing of funds and their use match in sense and also reveal the prudence.

A firms financing and investment decisions the financial statement of the business indicate
assets, liabilities and capital on a particular date and also the profit or loss during a period.

But it is possible that there is enough profit in the business and the financial position is also
good and still there may be deficiency of funds or of working capital in business. If the management
wants to find out as to where the funds is being utilized, financial statement cannot help. Therefore a
statement is prepared of the sources and applications of funds from where working capital comes and
where it is utilized. This is called Fund Flow statement.

Funds Flow statement is an analytical tool in the hands of financial manager. The basic
purpose of this statement is to indicate on historical basis the changes in the working capital i.e.,
where funds came from and where they are used during a given period. The funds flow statement or
statement of changes in financial position is a statement of flows, it measures the changes that have
taken place during two balance sheet dates.
 According to R.N.Anthony, “Fund Flow is a statement prepared to indicate the increase in
funds resources and the utilization of such resources of a business during the accounting period.”

Fund + Flow = Fund Flow.

MEANING OF FUND

The term fund has a variety of meaning such as funds fund, capital fund and working capital
fund.

Funds fund-In a narrow sense, fund means only funds. ‘Funds flow statement’ portrays net
effect of the various business transactions on funds into account receipts & disbursement of funds.
This concept of preparing fund flow statement is not accepted, as there are many such transactions
which do not affect funds but represent the flow of found. For example: purchase of furniture on
credit does not affect funds but there is flow of fund.

Capital fund – Here fund means all financial resources used in the business, whether in the
form of men, money, material, machine & others.

Net working capital-Net working capital means difference between current asset and current
liabilities. Funds generally refer to funds or funds equivalent or to working capital.

MEANING OF FLOW:

The term ‘flow’ refers to changes or transfer and therefore the ‘flow of funds’ means transfer
of economic values from one asset to another, from one liability to another, from one asset to
liabilities or vice-versa or a combination of these. So flow of fund refers to increase or decrease in net
working capital.

The increase or decrease in net working capital will take place only when one account, out of
two accounts to be affected in a transaction, is a current account i.e., current asset or current liabilities
and the other account is non current account i.e., fixed asset or long term liability or capital.

When a change in noncurrent account is followed by a change in another noncurrent account,

it does not amount to flow of fund. It is because, in such case, neither the working capital increase nor
decrease.

Importance of funds flow statement:

Funds flow statement is an important analytical tool for external as well as internal uses of
financial statements. The users of funds flow statement can be listed as under:
 Management of various companies are able to review funds budgets with the aid of funds
flow statement. They are extensively used by the management in the evaluation of alternative finance
& investments. In the evolution of alternative finance & investment plans, funds flow statement helps
the management in the assessment of long-range forecasts of funds requirement & availability of
liquid resources. The management can judge the quality of management decisions.

Investors are able to measure as how the company has utilized the funds supplied by them &
its financial strength with the aid of funds statements. They gauge can be company capacity to
generate funds from operations. On the basis of comparative study of the past with the present,
investors can locate & identify possible drains on funds in the near future.

Funds statement serve as effective tools to the management for economic analysis as it
supplies additional information, which cannot be provided by financial statements, based on historical
data.

Fund statement explains the relationship between changes in working capital & net profits.
Funds statement clearly shows the quantum of funds generated from operations.

Funds statement helps in the planning process of a company. They are useful in assessing the
resources available and the manner of utilization of resources.

Funds statement explains the financial consequences of business activities. They provide
explicit & clear awareness to questions regarding liquid & solvency positions of the company,
distribution of dividend & whether the working capital has been effective or otherwise.

Management of companies can forecast in advance the requirements of additional capital &
can plan its capital issue accordingly.

Fund statement provides clues to the creditors & financial institutions as to the ability of a
company to use funds effectively in the best interest of the investors, creditors & the owners of the
company.

Funds statement indicates the adequacy or inadequacy of working capital.

The information contained in fund flow statement is more reliable, dependable & consistent
as it is prepared to include funds generated from operations & not net profit after depreciation.

Funds flow statement clearly indicates how profits have been invested, whether investments
in fixed assets or inventories or ploughed back.
 NEED AND SIGNIFICANCE OF STUDY

 Many business owners disregard the importance of Funds flow statements because they unwittingly
believe that their current financial standing can be construed from other financial reports and
projections.

 Unfortunately, however, a Funds flow statement is necessary to adequately assess the incoming and
outgoing flow of Funds and other resources in a business.

 Not only will a business owner with a Funds flow system be more aware of his or her financial
standing, but it will also help investors to make educated decisions on future investments. A business
with regular and reliable Funds flow statements shows more economic solvency, and is more
attractive to investors.
 A Funds flow statement documents the incoming and outgoing Funds in plain terms. Future sales and
sales made for credit (unless they have been paid off) are not included in the Funds flow statement,
and most of the data will come from core operations.

 This will allow a business owner to compare past periods with the current financial standing and
determine whether your receivables have increased or decreased.

 There are typically five different sections in a Funds flow statement, though large businesses might
have more complex Funds flow systems as required.