Fund Flow Statement vs Cash Flow Statement: Key Differences Every Credit Analyst Must Know
Banks require both fund flow and cash flow analysis in CMA reports, but they serve very different purposes. This guide explains what each statement reveals, how they're constructed, and why credit officers cross-reference both.
Why Two Statements?
At first glance, fund flow and cash flow statements seem to answer the same question: where did the money come from and where did it go? But they operate at different levels of abstraction and serve distinct purposes in credit appraisal.
- Fund Flow Statement tracks changes in working capital — it shows how long-term sources and uses of funds affected the business's financial position
- Cash Flow Statement tracks actual cash movement — it reconciles the opening and closing cash balances through operations, investing, and financing activities
Fund Flow Statement
What It Shows
The fund flow statement answers: How was the working capital position affected during the year?
It is derived by comparing two consecutive balance sheets and is structured as:
Sources of Funds:
- Net profit (after adding back depreciation)
- Increase in term liabilities
- Increase in equity capital
- Sale of fixed assets
- Decrease in non-current assets
Application of Funds:
- Net loss (if any)
- Purchase of fixed assets
- Repayment of term loans
- Dividends paid
- Increase in non-current assets
- Tax paid
Net result: Increase or decrease in working capital
A Real Fund Flow Example
| Sources | Amount (Rs L) | Applications | Amount (Rs L) |
|---|---|---|---|
| Net Profit After Tax | 65.00 | Purchase of Fixed Assets | 80.00 |
| Depreciation | 18.00 | Repayment of Term Loan | 25.00 |
| Increase in Term Loan | 50.00 | Dividend Paid | 10.00 |
| Increase in Capital | 10.00 | Tax Paid | 20.00 |
| Increase in Investments | 5.00 | ||
| Total Sources | 143.00 | Total Applications | 140.00 |
| Net Increase in WC | 3.00 |
What Banks Look For
- Sources should be predominantly from operations (profit + depreciation), not from fresh borrowings
- Capex should be funded from term loans and equity, not from working capital
- Diversion of funds — if working capital has been used to buy fixed assets, it's a red flag
- Consistency — the change in working capital must reconcile with the change shown in Form III balance sheets
Cash Flow Statement (AS-3 / Ind AS 7)
The cash flow statement follows Accounting Standard 3 (AS-3) or Ind AS 7 and presents cash movements under three heads.
Structure (Indirect Method)
A. Cash Flow from Operating Activities:
- Start with Net Profit Before Tax
- Add back: Depreciation, interest expense, loss on sale of assets
- Deduct: Interest income, profit on sale of assets
- Adjust for changes in working capital (increase in debtors = cash outflow, increase in creditors = cash inflow)
- Deduct: Tax paid
- Net cash from operations
B. Cash Flow from Investing Activities:
- Purchase of fixed assets (outflow)
- Sale of fixed assets (inflow)
- Purchase/sale of investments
C. Cash Flow from Financing Activities:
- Proceeds from borrowings (inflow)
- Repayment of borrowings (outflow)
- Dividends paid (outflow)
- Interest paid (outflow)
- Equity raised (inflow)
Net change in cash = A + B + C
A Real Cash Flow Example
| Particulars | Amount (Rs L) |
|---|---|
| A. Operating Activities | |
| Net Profit Before Tax | 85.00 |
| Add: Depreciation | 18.00 |
| Add: Interest Expense | 22.00 |
| Operating Profit Before WC Changes | 125.00 |
| Increase in Debtors | (12.00) |
| Increase in Inventory | (8.00) |
| Increase in Creditors | 6.00 |
| Cash Generated from Operations | 111.00 |
| Less: Tax Paid | (20.00) |
| Net Cash from Operations | 91.00 |
| B. Investing Activities | |
| Purchase of Fixed Assets | (80.00) |
| Sale of Old Equipment | 3.00 |
| Net Cash from Investing | (77.00) |
| C. Financing Activities | |
| Term Loan Raised | 50.00 |
| Term Loan Repaid | (25.00) |
| Interest Paid | (22.00) |
| Dividends Paid | (10.00) |
| Net Cash from Financing | (7.00) |
| Net Change in Cash | 7.00 |
Head-to-Head Comparison
| Aspect | Fund Flow Statement | Cash Flow Statement |
|---|---|---|
| Focus | Working capital changes | Actual cash movement |
| Basis | Accrual (balance sheet changes) | Cash basis adjustments |
| Structure | Sources vs Applications | Operating / Investing / Financing |
| Depreciation | Added back as source | Added back in operating section |
| Working capital items | Shown as net change | Each item adjusted individually |
| Standard | No specific AS mandate | AS-3 / Ind AS 7 |
| Primary use in CMA | Validates no fund diversion | Validates cash generation capacity |
Why Banks Need Both
Fund Flow reveals structural issues
- Are long-term assets being funded from short-term sources? (maturity mismatch)
- Is working capital being diverted to non-business purposes?
- Are term loan repayments straining working capital?
Cash Flow reveals operational quality
- Is the business actually generating cash from operations, or are profits paper-only?
- Can the business sustain debt service from operating cash flow?
- How dependent is the business on external financing?
A business can show profit on paper (accrual basis) while bleeding cash. The cash flow statement catches this. Meanwhile, a business can have adequate cash flow but be diverting working capital to capex — the fund flow statement catches that.
In CMA Reports
CMA Report generates both statements automatically from your P&L and Balance Sheet data. The fund flow reconciles with Form III balance sheet changes, and the cash flow follows the AS-3 indirect method format. Both are included in the exported PDF with full cross-references.