Fund Flow Analysis

How To Do Fund Flow Analysis of a Company.

An Investor should be able to understand the fund flow analysis of a company. “Fund Flow Analysis is a detailed study of how funds are flowing between two financial years with the help of balance sheet.” It tells from where the funds have come in a company and where have the funds been deployed by the company.

The balance sheet is the financial statement which specifies the assets and liabilities of a company. Balance Sheet is a summary which gives a great information of company’s financial state on given date. It gives detail of changes in debt position, execution of the projects and movement of cash & investment in the company.

It is very important for an investor to study the fund flow statement while going through the balance sheet of a company. I advise everyone to do fund flow analysis of a company.

Fund Flow Analysis

As I have said before fund flow statement is the study of how funds are flowing with the help of balance sheet. First, we will understand assets and liabilities which is an integral part of  Balance Sheet.

a) Assets

In a Balance sheet there are two types of assets i)Current Assets ii) Long-term Assets or Non-Current Assets. Current Assets includes all the assets which are to be used within a year. For example- Cash & Investment, Inventories, and Receivables.

Long-Term Assets includes all the assets which are to be used for long period of time usually more than one year. For Example – Fixed Assets like Plants & Machinery.

b) Liabilities

Liabilities are of two types i) Current ii) Long-Term or Non – Current Liabilities. Current Liabilities includes all the borrowing which is to be paid back within a year. For example – Short-term borrowing and Account Payables.

Long-Term Liabilities includes long-term borrowing.It also includes shareholders’ fund which a company receives from investors who invests in a company through the stock market.

Treatment of Assets & Liabilities:

Assets – Whenever there is an increase in asset component in the current year in comparison with the previous year, it simply means that the funds have moved out of the company.On the other hand, if assets have decreased in the current year in comparison with the previous year, the funds have moved in the company.

For example, if we buy a car to drive, we pay to buy this asset. So when we buy it, there is a fund moving out of our pocket. If we sell a car(asset), then it is a fund which is coming in our pocket.

Liabilities – It is completely opposite of assets. If liabilities in the current year is increased in comparison with the previous year, the fund has moved in the company, while when liabilities has decreased in the current year in comparison with the previous year it means funds have moved out of the company.

For example, when we buy a loan from the bank, the fund comes in our pocket, while when pay off our loan the fund moves out of our pocket.

Also read: How To Do Financial Analysis of a Company.

Important Points To Remember:

For Assets:

Increase In Asset = Outflow of Fund.

Decrease In Asset = Inflow of Fund.

For Liabilities:

Increase In Liabilities = Inflow Of Fund.

Decrease In Liabilities = Outflow Of Fund.

Now let’s try an understand the Fund Flow Analysis Of a company with an example.

Here, is a Balance Sheet of DHP India Ltd. I have taken the Balance Sheet from the Annual report of FY 2017.

Fund Flow Analysis

As we can see it is Balance Sheet for FY2017. It consists of equity and liabilities in one section and assets on another. The balance sheet also consists of data for FY2016. We have to study the movement of a fund from FY2016 and FY2017. We will study it one by one.

Whenever there is fund flowing inside the company I have denoted it with a green upper arrow and whenever there is an outflow of a fund from the company I have used a red downward arrow.

1) Equity and Liabilities

fund flow analysis

An Inflow of the Fund (Equity & Liabilities):

If any section of liabilities increases in the current financial year in comparison with previous year, then there is an inflow of fund.

a) Reserves and Surplus (Net Profit – Dividends): It is money which is transferred to Reserves and Surplus after paying the dividends to shareholders.An increase in R&S is a very good sign as money is coming in the company from core operations.

In FY 2016 it was 32.80 Cr and in FY2017 it was 41.72 Cr.

Reserves & Surplus = 41.72 – 32.80 = Rs 8.9 Cr

b) Trade Payables: It is the money to be paid to the creditors from where the company has bought goods and services in advance.

In FY2016 it was Rs 1.23Cr and in FY2017 it was Rs 1.51Cr.

Trade Payables = 1.51Cr – 1.23Cr = Rs 0.28Cr

c) Other Current Liabilities: It includes other current liabilities like advances from customers, unclaimed dividends etc.

In FY2016 it was 1.14Cr and in FY2017 it was 1.27Cr

Other Current Liabilities = 1.27Cr-1.14Cr = Rs 0.13Cr

d) Short-Term Provision: It consists of provisions for taxes which includes advance taxes paid early if any or provision for taxes on dividends etc.

In FY2016 it was 1.59Cr and in FY2017 it was Rs 1.76Cr

Short-Term Provision = 1.76Cr – 1.59Cr = Rs 0.17Cr

An Outflow of the Fund (Equity & Liabilities):

If any section of liabilities decreases in the current financial year in comparison with previous year, then there is an outflow of the fund.

a) Short-Term Borrowing: It is borrowing to be paid by the company which it has taken for a short period of time. For example- Loan taken from banks for short period of time. A decrease in this amount shows that the management of the company is willing to pay off its debt which is a good sign.

In FY2016 it was Rs 2.67Cr and in FY2017 it was 1.76Cr.

Short-Term Borrowing = 1.76Cr-2.67Cr = -0.91Cr. Negative sign fund has moved out of the company.

If you will observe, one important section is missing in liabilities. Can you guess it???It’s long-term borrowing. The company has no long-term borrowing. The company has zero long-term borrowing which has resulted in D/E ratio of zero.

2) Assets

fund flow analysis

 

An Inflow of The Fund (Assets)

If any section of assets decreases in the current financial year in comparison with previous year, then there is an inflow of fund.

a) Fixed Asset: Fixed Asset includes plants and machinery used for producing products so that it can generate revenue.

The increase means that company has invested funds in buying the asset, while decrease means the company has sold off the assets. The correct reason should be known by the investor by going through the notes.

In FY2016 it was 12.38Cr while in FY2017 it was 11.91Cr.

Fixed Asset = Rs11.91-Rs12.38Cr = -0.47Cr.

b) Deferred Tax Assets: It includes the tax paid by the company due to the timing difference.

In FY2016 company had paid 0.3Cr of tax while in FY2017 it has paid 0.21Cr of Tax

Deferred Tax Assets = 0.21 -0.3 = -0.09 Cr. Very low amount should not have a great impact on fund flow statement.

c) Trade Receivables: It is the amount to be recovered from the customers who have been given products or services on credit. A decrease in this amount is a good sign as it means that the company has recovered money from pending customers.

In FY2016 it was Rs 4.42Cr and in FY2017 it was 3.82Cr.

Trade Receivables = 3.82-4.42 = -0.6Cr

d) Cash & Bank Balance: It is the amount of cash in an account of the company. Decrease in cash amount in the present year in comparison with previous year means that the company has withdrawn money from its account.

In FY2016 it was 1.85Cr and in FY2017 it was 0.29Cr

Cash & Balance = 0.29 – 1.85 = -1.56Cr

e) Other Current Assets: It includes any of the other current assets which form a very basic function in a company.

In FY2016 it was 0.12Cr and in FY2017 it was 0.09 Cr. It is a very minimum value which can be avoided.

Other Current Assets = 0.09 – 0.12 = -0.03 Cr

An Outflow of The Fund(Assets)

If any section of assets decreases in the current financial year in comparison with previous year, then there is an inflow of fund.

a) Current Investment:  It includes investment made by a company in any of the mutual fund, equities or debt fund.

In FY2016 it was 14.62Cr and in FY2017 it was 23.70Cr

Current Investment = 23.70 – 14.62 = 9.08Cr. It means in comparison with previous year, the company had invested Rs 9.08Cr in current investment.

b) Inventories: It is a section which includes inventories used to produce final products of a company.

In FY2016 it was 7.17Cr and in FY2017 it was 9.27Cr.

Inventories = 9.27 – 7.17 = 2.1Cr.

c) Short-Term Loans & Advances: It includes advances provided by the company on a short-term basis. An investor should check if the company is providing any such kind of loan to its relatives which cause an outflow of the fund and wealth destruction for shareholders.

In FY2016 it was 1.55Cr and in FY2017 it was 1.72Cr.

Short-term Loans & Advances = 1.72-1.55= 0.17 Cr

Now we will take the combination of inflow and outflow from both the sides.

Also read: How To Analyse Operating Performance of a Company

Inflow Of The Fund:

1.  R & S = Rs 8.9 Cr.

2. Trade Payables = Rs 0.28Cr.

3. Other Current Liabilities = Rs 0.13Cr.

4. Short-Term Provision = Rs 0.17Cr.

5. Fixed Asset = 0.47Cr. 

6. Deferred Tax Assets = 0.09 Cr

7. Trade Receivables = 0.6Cr 

8. Cash & Balance = 1.56Cr 

9. Other Current Assets = 0.03 Cr.

Total = 12.23 Cr.

Outflow Of The Fund:

1. Short-Term Borrowing = 0.91Cr.

2. Current Investment  = 9.08Cr.

3. Inventories = 2.1Cr.

4. Short term Loans & Advances = 0.17 Cr.

Total = 12.26Cr.

As we can see that the fund flow analysis provides a detailed result of how funds flow and sources and application of funds. An Investor should check if the management of the company is using the fund for its own benefits by giving fund to its other company through related party transaction or for the benefits of the company.

Reading notes to an account of a balance sheet is very important for the investor to gain further knowledge. Read the notes as it will give detailed information regarding the financial position of the company.

I hope this post has helped you in gaining knowledge about fund flow analysis. Stay tuned for more posts.

Happy Investing!!!!

About the author

Yash Birajdar

Hey I'm Yash Birajdar, an Engineer, Pistol Shooter and a Value Investor. I am here to learn and help readers with knowledge related to Value Investing In Stock Market in simple way.

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