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PAYMENT ADVICE – DEFINITION, COMPONENTS & FORMAT

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For any business, irrespective of its size of operations, small or medium or large scaled enterprises, it is always important to keep track of money that flows into the business. Once an invoice is issued by you, you as a prudent businessman want to ensure that every one of them is paid so that you have a healthy cash flow.

As a businessman, you also want to keep your customer relationship healthy and show a professional and courteous approach to money management. Here, in this scenario, maintenance of documents such as payment receipts and payment advice notes comes in very handy for any business.

What is payment advice or payment advice note?

Payment advice note is a document or letter of communication sent by a customer or buyer to businesses which states that an invoice has been paid to vide cheque, NEFT, RTGS or by any means of electronic transfers etc.,

It is a letter of communication that acknowledges the seller as to which outstanding invoices have been cleared by the buyer and by what means. Therefore, a payment advice note can be very useful when it comes to matching payments to an invoice.

Difference between payment receipt and payment advice note

Payment receipt Payment advice notes
A payment receipt is a document showing the proof of payment issued by the supplier

 

It is usually issued by the supplier to the customer to acknowledge receipt of payment.

 Payment advice is sent by customers to the seller

 

This is issued by the customer to the supplier that an invoice has been paid and it provides the invoice reference and date as well.

Components of payment advice

Payment advice should contain the following information :

  • The date on which payment advice was drafted.
  • A reference to invoice number or invoice number against which the payment has been made.
  • The amount of payment against such invoice
  • The method of payment such as Cheque, NEFT, RTGS etc.,

Sample payment advice format

sample payment advice format

How do businesses generate payment advice?

Today, most businesses are using accounting software to manage the books which comes with the inbuilt capability to generate various statements including payment advice. Also, managing the outstanding bills portfolio has become very simple with the help of ERP software. It allows you to know the bills which has been paid and which has been outstanding due.

Payment advice processed using accounting software helps to ensure the professional standards have been followed as receipts can be easily tracked against the invoices in real-time.

Using Tally.ERP 9, makes it easier to generate payment advice and send it to suppliers/other parties along with the cheques/other instruments. It is fully flexible to add or remove the additional details from payment advice to meet your business needs.

Consolidated Balance Sheet: Definition, Example and Steps to Prepare it?

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What is a consolidated balance sheet?

A consolidated balance sheet is a financial statement that shows the financial position of a parent company and its subsidiary companies. In simple words, a consolidated balance sheet is mere consolidation of financial details of all a subsidiary including parent company and presenting as one balance sheet for the entire group.

A consolidated balance sheet is usually prepared by the business operating as a group of companies that have more than one subsidiary and it portrays the combined details of assets and liabilities.

What is Consolidated Balance Sheet

Format and example of consolidated balance sheet.

P Ltd acquired Q Ltd on 1.1.2018. Their balance sheet as at 31.3.2017 is given below. Using this, let us prepare a consolidated balance sheet.

P Ltd Balance Sheets as at

31st March 2017

Liabilities P Ltd

( INR )

 Assets P Ltd

( INR )
Share Capital :

10,000 Equity shares of Rs 10/- each fully paid

5,000  Equity shares of Rs 10/- each fully paid

  

1,00,000

 

–

 Fixed Assets

Investments :

4,000 Shares in Q Ltd

  80,000

 

40,000
General reserve 40,000 Stock  20,000
Profit and Loss Account 20,000 Debtors  25,000
Creditors 10,000 Cash and Bank   5,000
  1,70,000   1,70,000

Q Ltd Balance Sheets as at

31st March 2017

Liabilities Q Ltd

( INR )

 Assets Q Ltd

( INR )
Share Capital :

10,000 Equity shares of Rs. 10/- each fully paid

5,000  Equity shares of Rs. 10/- each fully paid

  

–

 

50,000

 Fixed Assets

Investments : –

4,000 Shares in Q Ltd

  45,000

 

–
General reserve 10,000 Stock  10,000
Profit and Loss Account 10,000 Debtors  10,000
Creditors   5,000 Cash and Bank  10,000
   75,000    75,000

Consolidated  Balance Sheet P Ltd and it is Subsidiary Q Ltd

As at 31.12.2017

consolidated balance sheet example

How do businesses prepare consolidated balance Sheet?

A consolidated balance sheet is a key financial statement in case of group companies. The financial statements of different companies belonging to the same group are consolidated to present the financial position as a whole.

Manually preparing a consolidated balance sheet involves several steps right from arriving the share capital, profits etc. and it is a tedious task. As a result, businesses have automated the task of consolidating financial information using accounting software. Thereby, consolidated balance sheet is readily available as an when required. Not just consolidated balance sheet but also several other key financial and accounting reports can be consolidated a click of a button.

Using Tally.ERP 9, you can consolidate the entire books of accounts, view consolidated reports and seamlessly compare the parent and subsidiary companies report.

In Tally.ERP 9, you can do this by creating a group company. It allows you to conveniently view all your companies in one place.

Group company creation in Tally.ERP 9

Group company function as a single economic entity, where financial reports such as balance sheet, profit and loss a/c and trial balance are consolidated without any impact on the transactions and real-time basis.

Using the group company, you can compare the performance of your subsidiary companies and keep a tab on the overall business.

Inventory Management: Importance and Benefits

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Inventory is one of the most crucial aspects of any business model. A close tab on the movement of inventory can make or break your business and that’s why entrepreneurs always emphasise on effective inventory management. While a few business owners do understand the significance and cruciality of tracking inventory on a regular basis, some fail to realise its importance making their business fall through the unseen cracks.

Importance and Benefits of Inventory Management

The importance of inventory management cannot be stressed enough especially for eCommerce and online retail brands. Accurate inventory tracking allows brands to fulfil orders timely and accurately. Inventory management in businesses must grow as the company expands. With a strategic plan in place that optimizes the process of overseeing and managing inventory, including real-time data of inventory conditions and levels, companies can achieve inventory management benefits that include:

Accurate Order Fulfilment

With an effective inventory management system, you can easily track the stock in the warehouse. Bid goodbye to overstocking, stocking of obsolete items, understocking and start focusing on making your brand become one of the key players in the market space. Develop a robust plan with the help of an efficient accounting software and avoid inaccurately filled orders, high return volumes and a loss of customer base.

Better Inventory Planning and Ordering

Striking a balance between the demand and supply is extremely crucial for businesses, thus, inventory management provides aid in better planning and ordering of stock items. Imagine having a huge demand for a particular product but not having enough material to supply the same. Sounds like your worst nightmare, right? A detailed inventory management mitigates these issues, allowing warehouse managers to refresh inventory only when needed. It’s both space and cost-effective.

Increased Customer Satisfaction

Since a systematic and robust inventory tracking system will give you a comprehensive view of your stock at-hand, it yields in an increased customer satisfaction. In retail sector, customers resent late deliveries or “out of stock” notifications and eventually never return to the website to fulfil their shopping needs. However, good inventory management leads to orders being fulfilled more quickly and shipped out to customers faster. The enhanced processes can help eCommerce and online retail brands build a strong repertoire with consumers – and keep them coming back for more.

Organised Warehouse

A good inventory management strategy leads to an organized fulfilment centre. An organized warehouse results in more efficient present and future fulfilment plans. This also includes cost-savings and improved product fulfilment for businesses utilizing the warehouse for managing inventory.

Minimise the Blockage of Financial Resources

The importance of inventory control is to minimise the blockage of financial resources. It reduces the unnecessary tying up of capital in excess inventories and also improves the liquidity position of the firm. With proper inventory tracking module, business owners can take quicker decisions about the stock lying in the warehouse more wisely.

Income Statement – Definition, Format and Example

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Definition of income statement

The income statement presents information on the financial results of a company’s business activities over a period of time.

It communicates to users how much revenue the company has generated during the period and the cost incurred by it in connection to generating such revenues. Income Statement is also called by different names as “statement of operations” or “statement of earnings” or “profit and loss statement”.

Business engaged in services usually prepare income statement instead of profit & loss a/c. While the objective remains the same, owing to the difference in the nature of business, few components are different in the income statement.

Components of income statement

Revenue

Revenues are the amounts from the sale of goods and services in the normal course of business. And net Revenue means all proceeds from the sale of goods and services excluding the returns.

 For example, Zen Phones, an electronic store selling phones and computers. This implies that Company A is in the sales business and its revenue is from the sale of computers and mobile phones.

Let’ take another example.

Max associates is a law firm rendering consultancy services to their clients. Here, they are engaged in the business of rendering services for which it charges a fee. So here fee is the revenue forming part of Income Statement.

However, there are also other forms of revenue such as interest income, royalty income, rental income etc. that will be part of the statement.

Expenses

Expenses are the amounts incurred to generate revenue and includes the cost of rendering services such as operating expenses, interest payments, rent, salaries and wages, taxes etc.

For example, Max associates is a law firm providing legal consultancy services to its clients.

In the process of rendering services, the company will incur various expenses such as promotional expense (advertisement expenses), sales managers’ salaries, depreciation on usage of fixed assets and other administrative expenses to earn revenue by rendering services. All these expenses form part of the income statement as they are incurred in relation to such revenues.

Net Income

Here, the net income is nothing but an excess of revenue over the expenses. In other words, after deducting all the expenses and taxes from the revenue earned during the period, remaining is the net income from the business operation.

Format of income statement

A format of an income statement is very important as it is the means of communication of operating results to outsiders. The income statement format includes details such as the company’s name, the title stating, “Income Statement”, the period covered, and other key components as discussed above.

Company Name

    Income Statement

          For the period ______
Particulars  Amount (Rs.) Amount (Rs.)
Revenues

Service revenue/revenue from sale of goods/royalty/rental/interest income/commission income etc.

   xxx
Expenses

Salary expense

Rent expense

Depreciation expenses

Office expenses

Bank charges

Interest expense

 

Total Expenses

  

xxx

xxx

xxx

xxx

xxx

xxx

  

 

 

 

 

 

 

 

xxx
Profit before taxes (Revenues – Expenses)   xxx
Tax Expense   xxx
Net Profit or Net Income (Profit before taxes – taxes)   Xxx

Single-step income statement format

 

Income statement example

Below is the income statement example of Max Associates, who are into legal consultancy service.

Max Associates

    Income Statement

          For the period 1-4-2019 to 31-3-2020
 Particulars Amount (Rs.) Amount (Rs.)
Revenues

Revenue from legal consultancy fee

    

25,00,000
Expenses

Salary expense

Rent expense

Depreciation expenses

Office expenses

Bank charges

Interest expense

 

Total Expenses

  

2,00,000

1,80,000

30,000

20,000

12,000

8000

  

 

 

 

 

 

 

 

4,50,000
Profit before taxes (Revenues – Expenses)   20,50,000
Tax Expense   3,00,000
Net Profit or Net Income (Profit before taxes – taxes)   17,50,000

Why do businesses prepare income statements?

We must mainly remember one thing that a company does not operate wholly on owned funds, it borrows money from outsiders to run its operational activities.

So, the external users of income statement i.e. investors, creditors and other lenders must make decisions about resource allocation as where to put their money. They use the income statement to find out answers for the questions they may have about the future profitability of the business.

  • For investors – This statement will help them to decide whether to keep or sell the shares they own in the company. The investors also use the income statement to determine the ability of a company to pay dividends.
  • For lenders – Lenders use the income statement to find out whether the company will be able to repay the loan with interest in the future.
  • Creditors – They use the income statement to determine whether the company will be profitable enough to repay their debts as they come due.

How do businesses prepare income statement?

With the help of ERP software, preparing an income statement is made a lot easier. Gone are those days where you need to wait for the closure of books to determine the net income. Today, most businesses have automated the preparation of various financial statement including income statement using ERP software or accounting software.

Usage accounting software has helped the business owners to frequently check the income statement and accordingly take the corrective actions as when required.

Cost Behaviour: Definition, Formula and Example

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Cost Behaviour – Definition

In any business setup, processes change overtime and the best way to overcome any unprecedented changes in the most appropriate way is to be well prepared in advance about the future outcomes. One such aspect which gets impacted with changes is cost behaviour.

Cost behaviour is an indicator of how a cost will change in total when there is a change in some activity. In cost accounting and managerial accounting, three types of cost behaviour are usually discussed:

  • Variable costs. The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity
  • Fixed costs. The total amount of a fixed cost will not change when an activity increases or decreases
  • Mixed or semi variable costs. These costs are partially fixed and partially variable

Understanding how costs behave is important for management’s planning and controlling of its organization’s costs, and for cost-volume-profit analyses (including the calculation of a company’s break-even point).

Formula

Variable Cost = Total variable cost/Units Produced

Fixed Cost = Total fixed cost/Units Produced

Examples of cost behaviour

  • Variable cost

An example of a variable cost is the cost of flour for a bakery that produces artisan breads. The greater the number of loaves produced, the greater the total cost of the flour used by the bakery.

  • Fixed cost

An example of a fixed cost is the depreciation and insurance on the bakery facility and equipment. Regardless of the quantity of artisan breads produced in a month, the total amount of depreciation and insurance cost for the month will remain the same.

  • Mixed cost

An example of a mixed cost or semi variable cost is the bakery’s cost of natural gas. Some of the monthly gas bill is a flat fee charged by the utility and some of the gas bill is the cost of heating the building. These two components of the gas bill are fixed since they will not change when the bakery produces more or less loaves of its bread. However, a third component of the gas bill is the cost of operating the ovens. This component is a variable cost since it will increase when the ovens must operate for a longer time in order to produce additional loaves of bread.

MIS Report: Definition, Types and Example

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What is MIS?

MIS Reports are reports required by the management to assess the performance of the organization and allow for faster decision-making. A Management Information System, often simply referred to as MIS, can be understood by looking at each of the words that make up the name. There is the management, the information, and the system. At the heart of it, such a system is one that will provide important information to the management of the company.

The complexities of running businesses, have made us more reliant on advanced technologies which will remove any room for errors. On one hand, it accurately states what a management information system does for the management of the company. On the other hand, it cannot be overemphasized that management information systems are very important to the smooth running of a business. It is crucial that businesses opt for an automated management information system is set up for better decision-making.

What is the need for MIS?

The following are some of the justifications for having an MIS system

  • Decision makers need information to make effective decisions. Management Information Systems (MIS) make this possible.
  • MIS systems facilitate communication within and outside the organization – employees within the organization are able to easily access the required information for the day to day operations. Facilitates such as Short Message Service (SMS) & Email make it possible to communicate with customers and suppliers from within the MIS system that an organization is using.
  • Record keeping – management information systems record all business transactions of an organization and provide a reference point for the transactions.

Components of MIS

The major components of a typical management information system are;

  • People – people who use the information system
  • Data – the data that the information system records
  • Business Procedures – procedures put in place on how to record, store and analyze data
  • Hardware – these include servers, workstations, networking equipment, printers, etc.
  • Software – these are programs used to handle the data. These include programs such as spreadsheet programs, database software, etc.

Types of information system

 

types of management information system

Management information systems find their way into just about every aspect of a company. They work with the people in the company, the technology in the company, its products, and the inter-relationships between all of these on a day-to-day basis. If you implement an MIS in your company, then the levels of efficiency you could potentially achieve with it are mind boggling.

Types of MIS reports in Tally.ERP 9

·       Accounting reports

To obtain information on the financial position, operational performance and economic activities of the business.

·       Financial reports

To determine the financial condition of an organisation as required by shareholders, creditors and government units.

·       Inventory reports

To manage the Inventory effectively since the actual status of stock items is obtained.

·       Management control reports

To utilise budgets, cost centre reports, scenario reports etc. for controlling activities.

Inventory Planning: Basic Concept and Benefits

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Inventory is one of the most crucial aspects of any business model. A close tab on the movement of inventory can make or break your business and that’s why entrepreneurs always emphasise on effective inventory management. While a few business owners do understand the significance and cruciality of tracking inventory on a regular basis, some fail to realise its importance making their business fall through the unseen cracks. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.

When in case of raw material inventory management function is essentially dealing with two major functions. First function deals with inventory planning and the second being inventory tracking. As inventory planners, their main job consists in analysing demand and deciding when to order and how much to order new inventories.

What is inventory planning?

Inventory planning refers to the process that any organization adopts to determine the optimal quantity as well as timing, with the sole aim of aligning such plans with the organization’s capacity to produce and make sales. Inventory planning usually affects the company in numerous ways. For example, it directly determines the cash flow of any organization and its profits margins with reference to those that have an over reliance on fast turnovers of materials and goods. Evidently, inventory planning is an important aspect of any business’s success.

Good inventory planning supports several vital business objectives including:

  • Customer service and satisfaction
  • Supply chain efficiency
  • Control of costs
  • Accurate sales and demand forecasting

Benefits of inventory control and planning

  • Cash Flow

Inventory control and planning allows small businesses to manage their cash flow opportunities. SMEs aren’t always able to purchase large amounts of inventory, due to limited capital. By having better control of their inventory, they can know exactly how much inventory they will need and when they need it. This can free up other capital to re-invest in other areas of the business.

  • Business intelligence

An inventory control and planning solution allows small businesses to gain insights into the fast-selling products. This allows them to adjust their product line and to make quick and smart business decisions.

  • Maximize profits

By being able to make better business decisions the inevitable outcome for a small business will be an increase in profits. This is because the stock in their inventory will only be stock that’s actually selling. Other stock that doesn’t grab customer’s attention can be deemed obsolete and can be abandoned. This makes the general business practice more efficient.

  • Limits employee mishandling

Inventory planning and control limits the ability of employees to steal from the inventory. Often employees use items from a business’ inventory for personal use. Without inventory control, the business owner would be none-the-wiser. This practice ultimately reduces the profitability of the business. By limiting the ability of the employee to steal, the employer is reducing potential ‘hidden’ costs.

  • Reduce labour costs

Improved inventory planning and control techniques allow small businesses to reduce labour costs associated with inventory. These include the time spent counting stock and the transportation of stock. Employing an intelligent inventory planning and control solution can significantly reduce all these labour-intensive activities.

Conclusion

Earlier, the conventional way to track inventory was to use pen and paper. Over a period of time, businesses switched to spreadsheets, and most small businesses still manage their inventory in the same manner. However, as the business grows, it becomes next to impossible to continue using manual methods or spreadsheets, since a business owner will end up spending more time managing inventory rather than focus on the overall business. Also, inherently entering data by hand, is time consuming and error prone, and tends to be a repetitive task, which can easily be automated. Most importantly, an efficient inventory management in today’s day and age demands a centralized database that is accessible to multiple resources in your business, across multiple locations and updates on a real-time basis.

It needs to be noted here that inventory management software isn’t the only technology that can help a business manage its inventory and stock efficiently. It also includes mobile scanners, POS machines, barcode machines and a host of other equipment which can automate your inventory processes.

Business Report: Definition, Format and Example

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Any business, irrespective of the size needs to be organised to achieve its goal, whatever it maybe. A well-structured firm has more chances to achieve success and sustain for a prolonged period in the market as compared to a disorganised business. Each department needs to be tracked and analysed on a timely basis so that various business decisions can be taken appropriately.

Since most businesses are a part of an ever-changing environment, it is crucial to roll and embrace the changes. And if you want to be a part of such rapidly changing scenario, it is imperative to manage all business activities rigorously. As a part of staying afloat in a competitive space, the need of managing business reports arises. Businesses may gather financial, marketing and sales-related information, or more technical data; a business report sample will be your all-time assistance to adjust purchasing plans, staffing schedules, and more generally, communicating your ideas in the business environment. These business reports would vary from business to business and there is no stringent rule to be followed while creating them as every business model is different and unique.

What are business reports?

A business report is a set of data which can provide historical information related to a company’s operations, production, specific department’s insights, and create a base for future decision-making processes or factual insights needed to organize business functions. According to Lesikar and Pettit, “A business report is an orderly, objective communication of factual information that serves some business purpose”. Like we said before that each business report would be different depending on the business model, but they all have one common trait: gathering data and tracking the business activities related to something specific.

General business report format

A good general format for a formal business report includes the following:

  • A cover sheet that lists the name of the report, your company name and address and the date
  • A table of contents, if the report is longer than 10 pages
  • An executive summary; an introduction section explaining the background of the report and any special methodology used
  • The main body of the report, with appropriate subheadings
  • A section with conclusions and recommendations
  • An appendix for non-essential attachments such as charts and graphs that don’t need to be in the body of the report.

Several businesses might not require such a structured format as a business report depending on the audience. For example, a balance sheet is a type of business report. It has a common structure that’s easy to replicate, and typically, every spreadsheet and accounting program has a template available that generates the report from basic inputs. Likewise, a marketing plan has a general format that includes a cover sheet, an executive summary, a budget and sections that detail market research, target market, positioning, competitive analysis and market strategy.

Example

There are 12 types of business reports that virtually every business and consultant needs:

  • Weekly activity reports
  • Project status reports
  • Sales reports
  • Digital marketing reports
  • Competitor analysis reports
  • Case studies
  • Growth strategy reports
  • Market research reports
  • Budget reports
  • Annual reports
  • White papers
  • Project plans
  • Business proposals

Each of these business reports serve different purposes and cater to different audiences. While creating business reports, it’s crucial to segregate your audience, so that you do not present an irrelevant report to your target group. One of the best ways to strike the right chord with your audience is to make your report visually appealing with data presented in the form of pie charts, diagrams, graphs, et al. No one likes to read documents which are text-heavy, so make your report interesting and pleasing to the eye.

Doing the right reporting and information delivery can have a significant impact on your organization and orientate its strategy better.

Data Synchronisation: Definition and Importance Benefits

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What is Data Synchronisation?

Data synchronisation is the effort to ensure that, once data leaves a system or storage entity, it does not fall out of harmony with its source, thereby creating inconsistency in the data record. Often, we might modify and update the data after it has been entered into the system. It is important that when we make such changes, all the alterations reflect in all the systems in the same way and there are no discrepancies, in order to avoid any errors. Data synchronisation provides a means of creating harmony and consistency among all the systems that have access to data.

Data conflicts can result in errors and low data quality, which consequently leads to a lack of trusted data down the line. With data synchronisation properly implemented throughout a system, a business will see performance improvement in many areas, including:

  • Logistics and transportation
  • Sales team productivity
  • Order management
  • Invoice accuracy
  • Business systems
  • Cost efficiency
  • Reputation management

Data accessibility and error resolution afford time savings, allowing emphasis to be put on important business development processes like marketing, new product development, and strategic decision-making. Virtually everyone benefits from clean, synced data.

  • Customers receive product information and service that meets their specific needs
  • Business users can interact with all department members using up-to-date information, in real-time, even globally
  • Executives receive the latest data when making important strategy decisions
  • Stockholders can easily stay on top of their business interests
  • Manufacturers access the most recent updates or changes for accurate design and production
  • Distributors have access to the most recent product and marketing information

Benefits of Data Synchronisation

·       Data availability

One of the key benefits of a data synchronization system is that data is made available locally, rather than through potentially expensive, less reliable, and slow connections to a single central database. Data is accessible locally even in the absence of any connection to a central database, so you are not cut off from data in the event of a failure of a network connection.

·       Response time

Synchronization improves response times for data requests for two reasons. Retrieval rates are faster because requests are processed on a local server, without accessing a wide area network. Also, local processing offloads work from a central database server so that competition for processor time is decreased.

Tally.ERP 9 has a robust mechanism to synchronise Master data, removing the need for convoluted approaches, giving both higher reliability, as well as allowing new forms of control architectures (example, allowing for a central system to ‘create and modify masters’, while the local systems are only allowed to enter transactions). You can share data between two or more instances of Tally.ERP 9 using a client–server environment using data synchronisation. Data synchronisation can be initiated from the client to the server or vice versa, depending on your user-defined configurations.

The concept of ‘On Demand Synchronisation’ – where systems actually align to a Tally.NET Synchronization Service, allowing each system to independently complete their work without needing to be ‘connected to each other live’.  It has immediate benefits of removing the ‘manual’ coordination between two end-points before data is exchanged – which is a current typical behaviour. It immediately increases the scale of ‘simultaneous uploads’ from ‘multiple points’ – as each system is now independently operating without clashing with another.

Fund Flow Statement: Definition, Format with Example

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Definition of fund flow statement

A fund flow statement is a statement prepared to analyse the reasons for changes in the financial position of a company between two balance sheets. It portrays the inflow and outflow of funds i.e. sources of funds and applications of funds for a particular period.

It is also righteous to say that a fund flow statement is prepared to explain the changes in the working capital position of a company.

Objectives of fund flow statement

A question arises as to why prepare fund flow Statement when we already prepare profit and loss and balance sheet. The need here arises because the profit and loss and balance sheet will not explain the reasons for a change in the financial position.

Profit and loss a/c and balance sheet will give two years figures i.e., current years and previous years. But it will not explain as to why the movement has happened, let’s say, the extent of use of long-term funds for a long-term needs and the use of short-term funds for a long term and short term. Here is why fund flow statement is prepared.

Broadly, a fund flow statement will give us the following two information:

  • Sources of funds – From where the funds have come in
  • Application of funds – Where these funds have been used

Components of a fund flow statement

A fund flow statement comprises of :

  • Sources of funds: It talks about the extent of funds availed from
    • Owners
    • Outsiders
  • Application of funds: It talks about how the funds have been utilized
    • Funds deployed in Fixed assets
    • Funds deployed in Current assets

Fund flow statement explained with examples

National Enterprises raised its funds from the following equation listed below:

  • Long term funds for its noncurrent assets.

Explanation: Noncurrent assets are a company’s long-term investments for which the full value will not be realized within the accounting year. Examples of noncurrent assets include investments in other companies, intellectual property (e.g. patents), and property, plant and equipment.

So, going by the accounting parlance, long term funds are generally raised by a company to meet its long-term requirements. So National Enterprises using its long-term funds for its non-current assets are the right utilization of funds and these details are explained by fund flow statement.

  • What if National Enterprises uses its short-term funds to finance its long-term assets?

Here the fund flow statement when prepared conveys the users of financial information that the usage of the fund has not been made properly by the company as it is living dangerously by utilizing its short-term funds for financing long term assets.

It means that when the company is in need for funds for repaying it to the short-term obligation, it will be in cash crunch situation since once an investment is made into long term assets by the company it, it will not be in a position to convert it into liquid cash at a later stage due to the nature of the investment.

This is how the fund flow statement explains the source of funds and its utilization or application, allowing the users of financial information interpret and know the impact on the business.

Benefits of preparing a fund flow Statement

  • It helps to explain the managers of funds as to why the company is sitting in liquidity strain despite making profits as reflected in profit and loss statement.
  • On the contrary, it helps the managers to understand as to how a company is financially strong despite losses made by it in its operation front.
  • A fund flow statement helps us to analyze whether any short-term funds are being used for long term purposes. The grey area which can only be highlighted by preparation of fund flow Statement.

Users of funds flow Statement

The most interested users of fund flow statements are the lenders of capital. They pay more attention to the fund Flow Statements than the Profit and Loss and Balance sheet.

For Example, Bankers who lend money to the company as Overdraft or Cash Credit in return for interest. The bankers use the information provided by the company in its profit and loss statement and balance sheet in preparing fund flow statements, which then enables them to take decisions as whether to provide its overdraft or cash credit facilities to its clients or not.

Fund flow statement format

Sources of Funds   Application of Funds  
 Capital

Debts

Funds generated from operations

Sale of assets (if any)

 

 

 

 

 

·       (Bal.fig) Excess usage of funds over sources.

[Decrease in working capital]

 xxx

xxx

xxx

 

 Funds utilised in creation of Fixed assets

Funds utilised in creation of other Non- current assets.

Funds utilised in repaying existing loans.

Funds utilised for paying dividends, taxes

 

*(Bal.fig) Excess of Funds over application of funds –

 

 

[ Increase in working capital]

 

 xxx

 

xxx

 

xxx

 

xxx

 

 

xxx
Total xxx   xxx
  • Increase in working capital

Possibilities may arise when long term sources are in abundance of uses or application resulting in a gap. Which we call in fund flow statement as ‘Increase in working capital’. As it is a free flexible source which can now be used by the company for funding its working capital requirements. Say short term loans outstanding (if any) can be paid from the long-term sources slot or dividends be paid etc.,

  • Decrease in working capital

Possibilities that the company has more uses of funds, but it has very limited long-term source available. At that time, the company will go for funds which are available in the nature of working capital.

As a result, the company will reduce the funds available for working capital and divert it for long term uses. So, by decreasing the working capital, we get the funds which are available for long term uses which form part of the source of funds.

The increase or decrease in working capital can be known by preparing a statement of changes in working capital. This statement compares the values of two years of the difference between Current asset and Current Liabilities and tells as to whether there is an increase or decrease in working capital.

How do modern businesses prepare a fund flow statement?

Given the importance of fund flow statements brings to the table, most of the businesses prepare and analyze this statement more frequently. Today, most businesses use ERP software or accounting software which automatically prepares the fund flow statement along with various other financial statements. This allows business owners and other users of financial information to analyze and make on-time smart business decisions.