Working Capital and Termloans

1. INTRODUCTION

This project at Marathon Electric India Limited on Funds Flow Analysis is to know the changes in Flow of Funds over a period of time.

This analysis (Funds flow) explains the various sources from which funds are raised and uses to which funds are put. It shows the change in assets and liabilities from the end of one period of time to the end of another period of time (i.e. between two Balance sheet dates).

The analysis of statement helps us in answering question such as what is the amount of funds generated from Operations. How were the Fixed Assets of Organization Financed? Whether the liquidity position of the organization increased? Etc.

2. INRODUCTION TO FUNDS FLOW

Concept of Funds

The term fund has been defined and interpreted differently by different experts. Broadly the term fund refers to all the financial resources of the company. On the other extreme, fund has been understood as Cash only. However, the most acceptable meaning if funds is working capital. Working capital is the excess of current assets over current liabilities.

Concept of Flow

The flow of funds refers to transfer of economic values from one asset or equity to another. When funds mean working capital, flow of funds refers to changes in assets and liabilities, which cause a change in working capital of the organisation. To identify a flow of funds, we have to understand the difference between current and Non - current Accounts.

Current Accounts and Non - Current Accounts.

Any account which is either current asset or a current liability is a current account. An account which is neither current asset nor current liability is Non - Current Account.

The concept of current accounts is important as fund implies working capital, which is the difference between current assets and current liabilities. If there is a change in a current account, there is a Possibility of Flow of funds if there is no change in any of the current accounts, there is cannot be any flow of funds.

General Rule

Transactions that involve only current Accounts do not result in a flow. In other words, if both the accounts getting impacted on account of a transaction are Current accounts there is no change in position of funds.

Similarly, transactions that involve only Non - Current Accounts also do not result in a flow.

Transactions that involve one current account and one non - current account results in a flow of funds.

2.1. Funds Flow Statement:

The Balance sheet of a firm provides information on assets and liabilities of the firm at the time of reporting. The change in the carrying amount of assets and liabilities during the reporting period reflects the outcome of the operating investment and financial decisions of previous and current period. The profit and loss account summarises the outcome of operating decisions. The balance sheet and the income statements are prepared on the accrual accounting basis and therefore, does not present cash flow for the year directly.

Firms invest in non-current assets and current assets. An enterprise is not required to arrange finance to support the total investment in current assets. A part of the investment in current assets is financed by spontaneous credits such as trade creditors and advances from customers. Therefore, an enterprise is required to finance only the balance of the investment in current assets, known as a working capital gap. In practise, investment in noncurrent assets and resources mobilised through long term sources of finance in a particular year seldom matches. This gap causes change in investment in working capital. Enterprise prepares and present fund flow statement, that focus on long term sources of finance and investment in noncurrent assets. It exhibits the working capital implication of changes in noncurrent assets and noncurrent liabilities. The change in working capital is presented as balancing figure in the fund flow statement. A fund flow statement does not exhibit changes in each component of the working capital.

In a fund flow statement, a fund is defined as working capital. Therefore, in a fund flow statement, working capital may be viewed as a reservoir and fund flows in and out of the reservoir on the account of transactions and events relating to noncurrent assets and noncurrent liabilities. Fund flow statement presents changes in working capital due to changes in noncurrent assets and noncurrent liabilities.

A fund flow statement is a summary of a firm's inflow and outflow of funds. It tells us from where funds have come and where funds have gone. Fund flows statement can indicate whether sourcing of funds and their use match in sense and also reveal the prudence or otherwise of a firm's financing and investment decisions The financial statement of the business indicate assets, liabilities and capital on a particular date and also the profit or loss during a period. But it is possible that there is enough profit in the business and the financial position is also good and still there may be deficiency of cash or of working capital in business. If the management wants to find out as to where the cash is being utilized, financial statement cannot help. Therefore, a statement is prepared of the sources and applications of funds from where Working Capital comes and where it is utilized. This is called Fund Flow statement. Funds Flow Statement is an analytical tool in the hands of financial manager. The basic purpose of this statement is to indicate on historical basis the changes in the working capital i.e., where funds came from and where they are used during a given period. The funds flow statement or statement of changes in financial position is a statement of flows, it measures the changes that have taken place during two balance sheet dates.

According to R.N. Anthony, "Fund Flow is a statement prepared to indicate the increase in cash resources and the utilization of such resources of a business during the accounting period."

Fund + Flow = Fund Flow

MEANING OF FUND

The term fund has a variety of meaning such as cash fund, capital fund and working capital fund.

1. Cash fund -In a narrow sense, fund means only cash. 'Cash flow statement'