Short answer: A funds flow statement shows where a company’s funds came from during an accounting period and how those funds were used. It is built by comparing the company’s balance sheets across two periods, which shows how funds moved from the previous financial year to the current one.
Last reviewed: 4 November 2026
At a glance
| Item | What it tracks | How it is read |
|---|---|---|
| Funds flow statement | Sources and uses of funds, derived from changes between two balance sheets | Based on historical data |
| Cash flow statement | Actual cash inflows and outflows | Records real cash movement |
| Rise in liabilities | Money the company has received | Inflow of funds, to be repaid later |
| Fall in liabilities | Existing obligations settled | Use or outflow of funds |
| Changes in working capital | Short-term assets and liabilities | Analysed to show how funds are generated and used |
What does the statement actually show?
The funds flow statement is also called the ‘application of funds’ statement or the ‘statement of sources’. Both names point to its two halves. The sources are where money came in, and the applications are where money went out.
The statement does not list every rupee a company spent. It works from the changes in its balance sheet items between two dates. That makes it a summary of movement, not a diary of transactions.
How do you read the sources and uses?
Start with the two balance sheets, one for each year. For each item, note whether it rose or fell. Then classify each change as a source or a use.
The statement answers one question: over the year, did the company bring in more funds than it used, or the reverse? A larger total of sources means funds were added. A larger total of applications means funds were consumed.
How do liabilities change the picture?
A liability is an amount the company owes to someone else, such as a bank or a supplier. An increase in liabilities is read as an inflow of funds, because the company has received money that must later be repaid.
A decline in liabilities means existing obligations have been settled. This is read as a use or outflow of funds, because cash has left the company to clear what it owed.
A hypothetical example in rupees
The figures below are invented for illustration and do not describe any real company.
Suppose “Sample Engineering Ltd” has these changes between two balance sheets:
- Term loan from a bank rose from Rs 40 lakh to Rs 55 lakh. Increase of Rs 15 lakh, read as a source.
- Trade creditors (money owed to suppliers) fell from Rs 10 lakh to Rs 6 lakh. Decline of Rs 4 lakh, read as a use.
- Stock of goods rose from Rs 20 lakh to Rs 26 lakh. Rs 6 lakh of money is now tied up in stock, read as a use.
Total sources: Rs 15 lakh. Total uses: Rs 10 lakh. The net Rs 5 lakh must show up elsewhere on the balance sheet, such as a higher cash balance. The statement shows the company borrowed more than it spent on settling debts and building stock, but it does not explain why the bank loan was taken.
How is it different from a cash flow statement?
A cash flow statement tracks actual cash inflows and outflows. A funds flow statement analyses changes in working capital and shows how funds are generated and used. The two are related but answer different questions.
The cash flow statement tells you how much cash moved. The funds flow statement tells you which balance sheet changes produced and absorbed funds. Neither replaces the balance sheet or the income statement, so the three are read together.
Who uses it, and what can it reveal?
Lenders use the funds flow statement to assess a company’s creditworthiness before approving loans. It shows whether the company is generating funds or relying on borrowing to meet its obligations.
It can also reveal liquidity bottlenecks. A profitable company can still run short of cash if its money is tied up in stock or in amounts owed by customers. Seeing this in the statement helps the company decide on a dividend distribution policy it can afford. The statement describes past movements, so it cannot confirm that the company will keep the same pattern.
What are its limits?
The funds flow statement is based on historical data. It shows what happened over a past period, not what will happen next. It cannot replace the balance sheet, income statement or cash flow statement, and it does not explain the purpose of every transaction. A reader who uses it alone will miss the reasons behind the numbers.
Frequently asked questions
Is a funds flow statement the same as a cash flow statement?
No. A cash flow statement tracks actual cash inflows and outflows. A funds flow statement analyses changes in working capital and shows how funds are generated and used.
Can a funds flow statement replace the balance sheet?
No. It cannot replace the balance sheet, income statement or cash flow statement. It is based on historical data and is read alongside them.
Who uses a funds flow statement?
Lenders use it to assess a company’s creditworthiness before approving loans. It can also help a company see liquidity bottlenecks when deciding on its dividend distribution policy.
Does it explain why each transaction happened?
No. The statement does not explain the purpose of every transaction. It shows where funds came from and how they were used, not the reasons behind each movement.
Sources and last check
Facts in this article were checked against the sources below on 4 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- icicidirect.com (broker education)
- kotakneo.com (broker education)
- upstox.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.
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