In this article we will discuss about the importance and limitations of funds flow statement.
Following are the uses of this which show its importance:
1. Fund Flow Statement determines the financial consequences of business operations. It shows how the funds were obtained and used in the past. Financial manager can take corrective actions.
2. The management can formulate its financial policies— dividend, reserve etc. on the basis of the statement.
3. It serves as a control device, when comparing with budgeted figures. The financial manager can take remedial steps, if there is any deviation.
4. It points out the sound and weak financial position of the enterprise.
5. It points out the causes for changes in working capital.
6. It enables the Bankers, Creditors or financial institutions in assessing the degree of risk involved in granting credit to the business.
7. The management can rearrange the firm’s financing more effectively on the basis of the Statement.
8. Various uses of funds can be known and after comparing them with the uses of previous years, improvement or downfall in the firm can be assessed.
9. The statement compared with the budget concerned will show to what extent the resources of the firm were used according to plan and what extent the utilisation was unplanned.
10. It tells whether sources of funds are increasing or decreasing or constant.
Limitations of Fund Flow Statement:
1. The Statement lacks originality because it is only rearrangement of data appearing in accounts books.
2. It indicates only the past position and not future.
3. It indicates Fund Flow in a summary form and it does not show various changes which take place continuously.
4. When both the aspects of a transaction are current, they are not considered.
5. When both the aspects of a transaction are non-current, even then they are not included in this statement.
6. It is not an ideal tool for financial analysis.
7. It is not an original statement but simply a rearrangement of data in the financial statements.