Financial analysis

One of the most important techniques of financial analysis is a preparation of funds flow statement. It is the statement which portrays the changes in the financial position of an enterprise. Balance sheet and income statement do not present a comparative picture, even if placed side by side in that much clarity as the statement of changes in financial position which focuses on the sources and uses of funds.

Funds flow statement is a technical device designed to highlight the changes in the financial condition of a business enterprise between the opening and closing balance sheet dates. The flow of funds results in mainly profits of a business due to business operations. And as has been well said that “a business with an income at it heals furnishes always oil for its own wheels”, it is the profit which becomes main sources of funds for a business. However, profitable companies can also be anemic with respect to working capital and since working capital is the life blood of an enterprise, its shortage can disturb the operating cycle of the business. It is this concept of ‘funds’, the flow which is to be examined in detail as to its sources and applications so as to know the net increase or decrease in working capital over a period of time, usually a year.

[...] Concept of funds flow statement: The meaning of funds flow or flow of funds illumination the concept of funds flow statement clearly the statement which analysis the flow of funds that is the reasons for changes in working capital is a funds flow statement. The reasons are set by the sources and application of funds and therefore the statement can be called as the statement of sources and application (uses) of funds. Some accountants prefer to call it in short as fund and to which place have gone. [...]

[...] Statement of sources and Applications PARTICULARS AMOUNT PATICULARS AMOUNT Sources of funds Application of funds Funds from trading Funds costs in operations Factitively or Operating profit Repayment of debentures Issue of shares and debentures Reduction in share Capital Sale Proceeds of Non- Interest and dividend paid current asset Long- term Payment of Long term loans Borrowings Decrease in working Increase in working capital Capital One of the valuable aids to the financial manager or the creditor is funds flow statement, with which evaluates how a firm uses funds and determines how these uses are financed. [...]

[...] Regarding the application of funds used for repayment of secured loans and used for purchase of fixed assets and funds used for working capital constitution respectively. Conclusion: It is concluded that during the period 2002-03 more than 27% of the funds came from trading activities. In the application of funds around 64% of the funds utilized for investing in fixed assets. And used for repayment of secured loans. STATEMENT TO CHANGES IN WORKING CAPITAL CHANGES IN WORKING CAPITAL PARTICULARS 1-4-2003 31-3-2004 INCREASE DECREASE Current assets: Inventories: Raw material Consumable stores Finished goods Sundry debtors Cash in hand Balance with bank Other current assets: Deposits Income tax(advance tax) Sales tax Total current assets Current Liabilities: Trade creditors Expenses payable Audit Fee Total current Liabilities Working capital (current assets -current liabilities) Net Increase-in working capital Total current assets Calculation of operating profit for the period (2002-03 to 2003-04) Particulars Amount Amount Net profit 12,58,689 Add: depreciation 2,06,12,016 Gross funds generated 2,18,70,705 Less: taxation for the year Net funds generated 2,18,70,705 STATEMENT OF SOURCES AND APPLICATION OF FUNDS FOR THE PERIOD (2002-03 TO 2003-04) SOURCES AMOUNT APPLICATIONS AMOUNT SECURED LOANS 4,72,908 SALES UNSECURED-LOAN 16,34,480 SECURED LOAN VEHICLE 1,86,10,566 GROSS BLOCK 3,32,36,937 FUNDS FROM OPERATION 2,18,70,705 INCREASE IN WORKING 60,82,762 WORKING CAPITAL INTERPRETATION: From the above table it is observed that the net working capital of the company shows increased From Rs to Rs in 2003-04. [...]