Funds Flow Analysis :

Funds flow indicates the flow of working capital between two balance sheet dates. It involves information relating to the various changes in working capital during the period involved. Every change in working capital is associated with a flow which could either be an inflow (sources of fund) or an outflow(uses of fund).

Under funds flow analysis these inflow and outflow of funds are analysed to explain the change in working capital between the two points of time.

The total sources of funds are categorized as ‘Long term’ and ‘Short term’. Similarly, the total uses are also categorized as ‘Long term’ and ‘Short term’. If the short term sources are more than the short uses, it indicates diversion of working capital funds and needs to be probed further. Sometimes, it may be a desirable thing e.g., in case of companies with very high current ratio, it may be desirable to use the idle funds for creating additional capacity. The guiding principle is that this diversion should not affect the liquidity position of the company to unacceptable level. In other words the current ratio as directed by banks should be maintained.