Advantages and Disadvantages Of Fund Flow Statement
See, when it comes to the company or business’s growth, financial data plays a crucial role. And like any other company or business out there, you’ll find many tools that help the decision-makers of that organization see whether they are achieving their financial as well as growth goals or not. One such tool is the fund flow statement of a company or business. In simpler words, a fund flow statement is a kind of vital bridge between a company’s past, present, and future financial standing.
There are certainly a lot of good things about these statements that’s why they are so important for a company, but what about the other side of the story? Well, that is what we are onto today because here we will be going over the possible advantages and disadvantages of the fund flow statement. So if you are here just for that, then you may wanna stick around until the end.
Advantages Of Fund Flow Statement
A Fund Flow Statement is a handy tool that shows you how your money moves in and out of your organization. It can help you with many things and in many ways, let’s find out what these things or ways are. Here we go.
1. Insight into Financial Management
See, a Fund Flow Statement is all about allowing you to see a clear view of how you manage your money. You can see where your money comes from and where it goes, that is the main advantage of such a statement. And if you are wondering where this will be helpful for you then we’d like to tell you that with this financial information at your disposal, you will be able to make better decisions about how to spend, save, and invest your money. This way, you can come up with a better growth plan for the future.
2. Identification of Cash Flow Trends
Another big perk of a fund flow statement is that you can track your cash flow over time pretty easily. You can see how your cash flow changes from one period to another. And if you are specifically looking for a trend or pattern in such a statement, then this can be a really helpful thing. For example, you can see if you have more cash coming in than going out, or vice versa, then it would be much easier for you to track and see if you have any seasonal fluctuations in your cash flow. It is one of the best moves to build a robust financial strategy for the long run.
3. Keeping an Eye on Your Liquidity
Measuring liquidity becomes a much easier task with fund flow statements like how much cash you have available to pay your bills and debts. Take it as a resource allocation thing, you can see how much cash you generate from your normal business operations and how much cash you use for other purposes, and that way you can easily optimize your business operations in the best way possible.
4. Proving Your Solvency
To the investors and stakeholders, all that matters is how financially stable and trustworthy you and your business/company are. Simple as that. And a Fund Flow Statement helps you demonstrate your solvency, which is how well you can pay off your long-term debts and obligations. This way, you can be more transparent with the investors, and assure them that your business is worthy of their investment.
5. Early Warning System
As we talked about earlier, how a fund flow statement can help you see and analyze specific trends in the finances of the business or company, right? Well, that has another perk associated with it, yeah, we are talking about how it can help you detect early warning for potential financial problems that occur or are about to occur in the near future.
6. Strategic Planning
Fund flow statements can be also really helpful in building up a long-term financial strategy to meet the growth goals in the long run. In a nutshell, such a statement is a direct indication of how well your company is performing, and with that information, you can work on the things that aren’t bringing you good ROI. So yeah, you can optimize those departments and take your business game to the next level.
Disadvantages Of Fund Flow Statement
A fund flow statement sounds like a useful tool to analyze a company’s financial health, right? Well, not so fast. Before you get too excited, you should know that fund flow statements have some serious drawbacks that can limit their usefulness and reliability. Here are some of the main disadvantages of fund flow statements that you should be aware of:
1. The Complexity Factor
See, when it comes to fund flow statements, they usually require a lot of accounting knowledge and skills to prepare and understand. Before you can even head to prepare a fund flow statement, you must know how to classify different types of funds, how to adjust the balance sheet items, how to calculate the net changes in working capital, and a lot of other things, all funds related. So yeah, if you are not passionate about accounting and how funds move in a company, you may find it a little too complex and boring too.
2. Limited Information
Fund flow statements only tell you part of the story, so if you wanna know the full story, you are clearly considering the wrong thing here. Such statements only focus on how funds have changed over a period of time, but they don’t tell you how much income or expense a company has generated or incurred. They also don’t show you what the current financial position or liquidity of a company is.
3. Outdated and Irrelevant
If we were to compare fund flow statements with something, then we’d compare it to old news. Yeah, they are just like that. That’s because these statements only show you what has happened in the past, but they don’t give you any clues about what will happen in the future. And that is kind of concerning about these statements because you can’t just look at a fund flow statement and prepare future plans based on that. It doesn’t work like that.
4. Subject to Manipulation
It is true that like any other financial statement, it is possible to hinder fund flow statements. That is why solely relying on a company’s fund flow statement is always a bad idea. See, when creative accounting people are around, they can easily trick you into thinking that a company’s fund flow statement is healthy and there are no financial troubles, but that isn’t the whole picture all the time. It is not really hard for an expert and creative accounting professional to manipulate fund flow statements, so yeah, always keep that in mind.
5. Doesn’t Reflect Non-Financial Factors
As discussed earlier, if you only focus on the financial data given in a fund flow statement, and don’t consider other factors, then you can easily be misled by any company or business out there. There are certainly some other things or factors that play a crucial role in determining that a company is achieving its financial and growth goals and there is not nothing shady going on inside the company.
That’ll do it. Now you know what’s the deal with fund flow statements, right? All in all, these statements offer you a good look at the financial standing of a company, but it would be not a good decision to ignore all the other analysis tools or factors.