Cash Flow_Fund Flow_Cash Forecasts

7/28/2019 Cash Flow_Fund Flow_Cash Forecasts

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Fund flow and Cash flow Analysis

Cash flow forecasts/budgets

By Sudha Agarwal

Chartered Accountant


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Contents

Definition of Fund Flow Statement

Advantages and Limitations of Fund Flow statement

Construction of Fund flow statement

Treatment of Special items

Definition of Cash Flow Statement Need for Cash Flow statement

Direct Method of cash flow

Indirect Method of Cash flow

Preparation of Cash Flow

Format of Cash Flow Difference between Fund flow and Cash flow


Methods of computing cash flow forecasts/budgets


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Fund Flow statement

a statement measures the inflows and outflows ofnet working capital that result from any type of

business activity

A statement summarising the significant financial

changes which have occurred between the

beginning and end of the companys accounting

period


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Advantages and Limitations

Advantages determines financial consequences of business

to obtain finance from Banks and FI

to plan financial resources, internal and external to compare plan v/s actual use of funds

guide for future requirements of funds

Disadvantages

Only rearranges facts appearing in financialstatements

Does not consider non fund transactions


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Construction of Fund Flow statement

1. Basic principles :increase in assets involves outflow of funds

decrease in assets involves inflow of funds

increase in liabilities involves inflow of funds

decrease in liabilities involves outflow of funds

2. Process of construction :

- Sources of funds

Issue of shares/debentures, Receipt of term loans/Fixed deposit, Saleof Fixed assets/Investments, Non operating income, Operating profit,Decrease in working capital

- Application of fundsRedemption of shares/debentures, Term loan repayments, Purchaseof fixed assets/Investments, Repayment of deposits/loans, Nonoperating expenses, Operating loss, dividends, Increase in workingcapital


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Treatment of special items

(a) Operating Profit/Loss

Net profit as per P&L

Add : Depreciation on FA, Preliminary expenses w/o,

Goodwill w/o, Loss on sale of FA/Invts, Non cash exps,

Non recurring or abnormal exps, Non operating exps

Less : Profit on sale of FA/Invts, Non recurring or

abnormal income, Non operating income


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(b) Statement showing changes in working capital

Particulars

Balance at

beginning

Balance at

end Increase Decrease

A Current Assets

Stock

Debtors

Bills receivable

Cash balance

Bank balance

Prepaid expenses

Advances

Marketable securities

B Current liabilities

Creditors

Bills payable

Outstanding expenses

Provisions

C Net working capital

(A - B)

D

Net Increase/Decrease during the

ear


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(b) Statement show ing changes in work ing capita l

Principles to be remembered Increase in CA increases WC

Increase in CL decreases WC

Decrease in CA decreases WC

Decrease in CL increases WC

( c) Provis ion fo r Tax or A dvance tax

Two ways to treat the same

Treated as CL or CA and will be routed thru the statement showingchanges in WC

Tax provn will be added back to profit as per P&L to arrive atoperating profit. Actual tax exps will be shown as Application offunds. Both will not appear in statement showing changes in WC


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(d) Dividend

Inter im and Final

Two ways to treat the same

Provn for proposed dividend treated as CL and

considered in changes in WC statement. The operating

profit will be shown as source of funds net of proposeddividend

Provn for proposed dividend and interim dividend is added

back to P&L to arrive at operating profit. Actual dividend

paid will be shown as Application of funds

(e)Non recurring/Abnormal income/expense

Income is deducted from profit

Expense is added back to profit


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Cash Flow statement

a statement depicting change in cash position offirm from one period to another.

It explains the total sources of cash and uses orapplication of cash to arrive at the net cash flow

Eg : - Cash balance at beginning is 20,000 and

cash balance at end of year is 30,000, then net

cash inflow during the year is 10,000


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Need for cash flow statement

- determines the liquidity position of the company

- availability of cash to pay dividends and taxes

- helps in efficient cash management

- helps in internal financial management- discloses movement of cash

- discloses success or failure of cash planning

eg co. has made huge profits but there is no cash to

pay dividends, coz debtors have not paid.


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Direct Method for cash flow statement

1. Cash from Operating activities

- Cash receipts from customers

- Cash paid to suppliers and employees

- Cash generated from operations

- Income tax

- Cash flow before extraordinary item- Proceeds from earthquake disaster settlement

Net Cash from operat ing activ i t ies

2. Cash from Investing activities

- Purchase of fixed assets- Proceeds from sale of equipment

- Interest received

- Dividend received

Net Cash from invest ing activ i t ies


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Direct Method for cash flow statement

3.

Cash from Financing activities- Proceeds from issuance of share capital

- Proceeds from long term borrowings

- Repayments of long term borrowings

- Interest paid

- Dividend paid

Net Cash used in f inancing act iv i t ies

Net increase in cash and cash equivalentsCash equivalents consists of cash on hand andbank balance, investment in money market(short term) and effect of exchange rate changes


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Indirect Method for cash flow statement

1. Cash from Operating activities

- Net Profit before tax and extraordinary itemAdjustment for :-

- Depreciation

- Foreign exchange loss

- Interest income

- Dividend Income- Interest expense

- Operating Profit before WC changes

- Increase in Sundry Debtors

- Decrease in inventories

- Decrease in Sundry Creditors- Cash generated form Operations

- Income tax paid

- Cash flow before extraordinary item

- Proceeds from earthquake disaster settlement

Net Cash from operat ing act ivi t ies


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Indirect Method for cash flow statement

2. Cash from Investing activities

- Purchase of Fixed assets- Proceeds from sale of equipment

- Interest received

- Dividend received

Net Cash from invest ing act ivi t ies

3. Cash from Financing activities- Proceeds from issuance of share capital

- Proceeds from long term borrowings

- Repayments of long term borrowings

- Interest paid

- Dividend paidNet Cash used in f inancin g act ivi t ies

Net increase in cash and cash equivalents

Cash equivalents consists of cash on hand and bank balance,investment in money market (short term) and effect of exchange ratechanges


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Preparation of Cash flow statement

Sources of Cash1. Internal Sources Cash from Operations

Adjustment for non cash items

Depreciation

Amortisation of intangible assets Loss/Gain on sale of Fixed Assets

Creation of reserves

Adjustment for changes in Current assets and current

liabilities Add Decrease in current asset other than cash, Increase in

Current liabilities (item wise)

Less Increase in current asset other than cash, Decrease in

Current liabilities (item wise


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Preparation of Cash flow statement

2. External Sources Issue of new shares

Raising long term loans

Purchase of P&M on deferred payments

Short term borrowings cash credit from banks

Sale of Fixed Assets

Applications of Cash1. Purchase of fixed assets

2. Payment of long term loans

3. Decrease in deferred payment liabilities

4. Loss on account of operations5. Payment of tax

6. Payment of dividend

7. Decrease in unsecured loans, deposits, etc


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Format of Cash flow statement

Cash flow statement for the year ending ..

Opening balance : Cash and BankAdd : Sources of cash

Issue of shares

Raising of long term loans

Sale of fixed assets

Short term borrowings

Cash from Operations :

Profit as per P&L a/c

Add/Less : Adjustment for non cash itemsAdd : Increase in Current Liabilities

Decrease in Current Assets

Less :Increase in Current Assets

Decrease in Current Liabilities

TOTAL CASH AVAILABLE

Less : Application of Cash :

Redemption of Preference shares

Redemption of Long term loans

Purchase of fixed assets

Decrease in Deferred payment liabilities

Cash outflow on account of operations

Tax paid

Dividend paid

Decrease in Unsecured loans, Deposits

TOTAL APPLICATIONClosing balance : Cash and Bank


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Difference between Fund flow and Cash flow

1. FF is broader concept, CF is narrower concept

2. FF based on accrual concept, in CF, cashreceipts and payments are recorded

3. FF used of planning immediate and lon termfinancing, CF used for short term analysis and

cash planning4. In FF statement of changes in WC is prepared,

in CF the same is not prepared

5. In FF, balance sheet items are classified into

current and non current, in CF this is notnecessary

6. In FF sources and application are matched, inCF it begins with opening balance of cash and

ends with closing balance of cash


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Forecasts both inflow and outflow

Prepared based on estimates of cash receipts

and cash disbursements

Three methods available for preparing cash

budget

Receipt and Payment method

Adjusted Profit and Loss account method

Balance sheet method


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Methods of computing cash flow forecasts/budgets

Receipt and Payment method Prepared on basis of all expected cash receipts and all cash payments

Anticipated cash receipts and payments are only considered, accruals and adjustmentsare not considered

Special care to be given to time lag in credit transaction

Adjusted Profit and Loss account method

Similar to preparation of cash flow statement To the Opening cash balance, cash profit is added.

To the profit as per P&L add depreciation, outstanding expenses, provision for tax,dividend etc

Add capital receipts, decrease in CA and increase in CL

Subtract capital expenditure, capital redemption, repayment of long term loans,increase in CA and decrease in CL

Balance represents closing balance

Balance sheet method

Budgeted balance sheet is prepared for all items of liabilities, capital and assets exceptcash.

The balancing figure denotes cash and bank balance or bank overdraft


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Thank You

Cash Flow_Fund Flow_Cash Forecasts

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