Material for PGPSE participants of AFTERSCHOOOL CENTRE FOR SOCIAL ENTREPRENEURSHIP. PGPSE is an entrepreneurship oriented programme, open for all, free for all.

1. HOW TO PREPARE FUNDS FLOW AND CASH FLOW ANALYSIS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india www.afterschoool.tk mobile : 91+9414430763

2. WHAT IS A FUND? WORKING CAPITAL (DIFFERENCE BETWEEN CURRENT ASSETS AND CURRENT LIABILITIES IS CALLED NET WORKING CAPITAL)

3. WHEN DO WE HAVE FLOW OF FUNDS? When working capital increases or decreases, it is called flow of funds.

4. Examples of funds flow All those transactions, when either working capital increases or decreases – examples : increase in capital (with increase in capital, cash will increase, so flow of funds) purchase of furniture (when you purchase, cash will reduce, so flow of funds take place) payment of long term loans (cash will decrease so flow of funds)

5. When we dont have funds flow?? When both the aspects of transations are related either to long term sources or to short term sources, there is no flow of funds. Example : issue of equity against fixed assets like building – there is no impact on working capital, so there is no funds flow

6. Rule of funds flow : Out of the two aspects of a transactions, one should be related to short term and the second should be related to long term, then only funds flow is possible.

7. Statements to be prepared ... Funds flow statement (FFS) – which shows all the transactions involving flow of funds statement of changes in working capital (SCWC) – all the transactions, which depict increase or decrease in working capital funds from operations (FFO) - adjusted profit and loss account, which removes all those transactions, which dont have any impact on funds

8. FUNDS FLOW STATEMENT Only those transactions, which are related to long term resources or long term applications – they do affect working capital, so they will come. We will not take short term resources or short term applications here. However, the other aspect of all these transactions is related to working capital. Example : purchase of building (for long term) against cash (from short term)

9. SCWC Statement of changes in working capital will show only items of working capital – like debtors, cash, inventory, BR, BP, short term liability, creditors, overdraft etc. They will be compared over the period (one year generally) and we will show whether they increased or decreased during the period.

10. FFO Profit from P&L account contains many items which dont affect flow of funds. These items will be adjusted in FFO. For example, depreciation doesnt involve any outflow of money or working capital, so depreciation has to be added back to profit (as it was deducted earlier in Profit in P& L account)

11. Examples of transactions Purchase of machine = FFS issue of equity = FFS increase in debtors = SCWC decrease in stock = SCWC (decrease in stock results in decrease in working capital, so it will come in SCWC) depreciation = FFO (there is no flow of funds in depreciation, so it will be added back to profit)

12. WHAT IS CAPITAL RECEIPT? Receipt which are of the nature of fixed capital are called capital receipt. In all these cases, there is also increase in money / bank balance, so this item will come in funds flow statement. Example : issue of equity / debenture / bonds

13. WHAT IS REVENUE RECEIPT? Receipts which are of the nature of circulating capital are called capital receipt Circulating capital is that part of the capital which is turned over in the business and which ultimately results in profit or loss. These transactions will not be recorded in FFS. The net difference of these will appear in SCWC (where we look at difference of bank balance over the period). Example : sales (it is not recorded in FFS,FFO etc.)

14. Machinery in the hands of a manufacturer is .... Fixed capital - therefore purchase / sale of machinary against bank / cash will come in FFS. However, purchase / sale against equity / debenture / bond will not come in any statement.

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