Cash flow and funds flow statements are both essential financial reports serving as a barometer of a company’s performance and efficiency in cash and funds management. The former contains a detailed description of cash and cash equivalents of a business, total inflows and outflows accruing to both accounting and investment purposes.

The latter, on the other hand, acts as a record of total inflows and outflows from a stipulated financial asset, hence reflecting its performance during the given period.

Cash flow statement of a company is an indicator of its financial health in terms of management, revenue generation and turnover. Conversely, funds flow statements are created to measure the profitability of a stock market tool through its market demand, as it portrays investor confidence in a particular instrument.

Both funds flow and cash flow analysis are crucial to ascertain the profitability of an investment portfolio, as they incorporate the potential of underlying companies as well as market preferences.

Components of the Cash Flow and Funds Flow Statement

Cash Flow Statement

A cash flow statement is prepared through the following parameters –

  • Cash flow from daily operations

This section of a CFS of a company comprises a detailed account of total monetary inflows and outflows incurred for output generation.

Daily operational expenses give investors an idea regarding the amount required by a business to convert raw materials into the finished product via manufacturing, through efficient management of human and physical capital.

Cash outflows, hence, highlight the expenses of a company incurred to fund its day-to-day functioning, such as raw materials, the salary of employees, utility charges such as electricity, etc. Such expenses collectively contribute to the total cash inflows of a business, through sales revenue, accounts receivable, etc.

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A positive CF balance has optimistic implications for a business, as it is indicative of efficient management. Contrarily, a negative cash flow balance is often viewed as a company’s inability to channel its resources for adequate revenue generation.

  • Cash flow from investments

Cash flow from investments accrues to capital expenditures and gains realised by a company. While new assets purchased are recorded as a cash outflow, it increases the productivity of an organisation in the long run. Contrarily, a sale of capital assets might imply a positive cash balance but hurt the revenue-generating capacity of a company.

Typically, a developing business categorised as the small or mid-cap company tends to have a negative cash flow from investments, as it indicates a rising potential in the long run. Large-cap companies, contrarily, can have a positive cash flow from investments. However, investors tend to give more importance to a positive cash flow balance from operations, as it reflects the turnover capacity of a company.

  • Cash flow from financing

Cash flow from financing entails details regarding equity and debt-oriented funds raised. Capital raised through additional shares reflects a positive cash flow from financing and has long term effects on a business. Similarly, cash inflows from the debt segment can be attributed to loans, debentures and certificates of deposits issued, etc.

Conversely, cash outflows contain expenses incurred to repay existing debt obligations, periodic dividend payouts, or share buybacks.

Such cash flow balances have different interpretations among investors. While some believe positive cash flow from the financing will lead to business expansion and growth in the future, a negative balance can indicate reduced debt holding, along with timely payouts to existing equity shareholders.

Funds Flow Statement 

A funds flow statement can be divided into two segments.

  • Working capital

This section of a funds flow statement contains details regarding the current asset base of a company.

An increase in current assets implies higher liquidity of a business, thereby enabling it to meet its short-term obligations related to production. Amount of working capital available with a company affects its sales revenue, thus impacting the cash flow from business operations.

However, while cash flow from operations considers all transactions related to the production cycle of a business, a funds flow statement only considers the differences between the current asset base and current liabilities of a company.

  • Sources of funds

Sources of funds take into account all monetary transactions affecting the long-term financial standing of a business. It is similar to cash flow from financing, as it contains details about finances raised through equity and debt-oriented schemes.

Additionally, it also depicts investor confidence in a particular stock market security, through total fund flows in the stipulated asset class. For example, a positive funds flow balance of a company implies that investors expect it to thrive in the future, and thereby realise capital gains when the asset price rises in the long run.

A negative funds flow has poor implications for a business, as consumers are hesitant towards investing in a stipulated asset due to uncertain performance. While short term negative balances of funds flow statements occur due to market volatility, long term outflows reflect the low intrinsic valuation of a company.

Differences Between Cash Flow and Funds Flow Statement

Understanding the differences between cash flow and funds flow statements can help investors gauge the profitability of a business venture with ease, as the two reports focus on two different aspects of a company. While cash flow analysis assesses the productive capacity and managerial aspects of a company, a funds flow statement helps individuals gain a comprehensive idea regarding investor confidence in a stipulated business.

One can distinguish between cash flow and funds flow statements via the following different pointers.

Points of Difference  Cash Flow Statement  Funds Flow Statement
Meaning  Detailed accounting balance containing all cash movements (inflows and outflows) of a company during a particular time. A statement containing information regarding net funds raised through equity and debt tools minus expenses such as dividend payouts, loan repayments, share buybacks, etc.
  1. Cash flow from operating expenses
  2. Cash flow from finances
  3. Cash flow from investments
  1. Working capital (accounting aspect)
  2. Sources of funds raised (investment aspect)
Purpose Investors can analyse the efficiency of a company through its cash flow statement. Investors can analyse the market demand for underlying security by going through a company’s funds flow statement.

Importance of Funds Flow and Cash Flow Analysis

Both funds flow and cash flow analysis play a critical role in indicating the profitability of a business venture. Under cash flow statements, cash flow from operations reflects the productive capacity of a company through revenue generated and subsequent profits. Looking into funds flow statements additionally can help investors get an idea about the market perception regarding the potential of a company.

While positive cash flow and funds flow statement label business as a profitable investment venture, it does not portray sufficient information regarding the company and market. It is because a current asset bubble in an economy can lead to high inflows as the market expects growth in performance of all underlying companies. However, such economic conditions are short-lived and can cause substantial losses for all investors overlooking the technical and fundamental analysis indicators.

Similarly, a negative cash flow statement and funds flow statement balance do not necessarily indicate a value trap investment. Short term fluctuations result from temporary stock market downturns due to varying systematic risks. Share prices of such companies tend to dampen during such times, and purchasing the same can often lead to significant capital profits in the future. However, it requires a comprehensive understanding of stock markets to identify such value investments.