The difference between cash flow and funds flow
/What is Cash Flow?
Cash flow refers to the current format for reporting the inflows and outflows of cash. Cash flow is derived from the statement of cash flows. This statement is required under Generally Accepted Accounting Principles (GAAP), and shows the inflows and outflows of cash generated by a business during a reporting period. The information in a statement of cash flows is aggregated into the following three areas:
Operating activities. Comprised of the main revenue-generating activities of a business, such as receipts from the sale of goods and payments to suppliers and employees.
Investing activities. Involves the acquisition and disposal of long-term assets, such as cash received from the sale of property.
Financing activities. Involves changes in cash from selling or paying off financing instruments, such as from the issuance or repayment of debt.
The statement of cash flows is part of the main group of financial statements that a business issues, though it is commonly considered to be third in importance after the income statement and balance sheet. The statement can be of considerable use in detecting movements of cash that are not readily apparent by perusing the income statement. For example, the income statement may reveal that a business earned a large profit, while the statement of cash flows shows that the same business actually lost cash while doing so (probably due to large investments in fixed assets or working capital). Thus, cash flow analysis is useful for determining the underlying health of a business.
What is Funds Flow?
Funds flow refers to an outmoded format for reporting a subset of the information that now appears in the statement of cash flows. The funds flow statement was required under GAAP from the period 1971 through 1987. The statement primarily reported changes in an entity's net working capital position between the beginning and end of a reporting period. Net working capital is an entity's current assets minus its current liabilities.
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Comparing Cash Flow and Funds Flow
Given the preceding explanations of cash flow and funds flow, there are several differences between the two concepts. They are as follows:
Breadth of definition. Cash flow is a narrower concept than funds flow, since funds flow encompasses all of working capital.
Currency of the information. Cash flow information is readily available from the statement of cash flows, whereas funds flow is no longer reported.
Source of information. Cash flow comes from the statement of cash flows, while funds flows used to come from the funds flow statement.
Usefulness of the information. Cash flow shows you how money came into an organization and how it was spent, while funds flow reveals the financial position of the business.