- What is a Fund Flow Statement?
- Fund Flow vs Cash Flow Statement
- Sources of Funds — Detailed Breakdown
- Uses of Funds — Detailed Breakdown
- Net Working Capital Change — The Tricky Part
- Worked Example
- Reconciliation — Sources Must Equal Uses
- What Banks Look for in Fund Flow
- Red Flags That Trigger Queries
- Generate Fund Flow Automatically
What is a Fund Flow Statement?
A Fund Flow Statement (CMA Form VI) shows the movement of long-term funds in a business during each financial year. It answers: where did money come from, and where did it go?
Unlike the Profit & Loss account (which shows income and expenses) or the Balance Sheet (which shows position at a point in time), the Fund Flow statement shows the flow of resources between two consecutive Balance Sheets.
In the CMA context, "funds" refers to long-term resources — equity, retained profits, and long-term borrowings. Short-term changes (like CC drawdowns or trade creditor movements) are not treated as "fund flows" — they are part of working capital movement.
Fund Flow vs Cash Flow Statement
| Fund Flow (Form VI) | Cash Flow (Ind AS) | |
|---|---|---|
| Focus | Long-term fund movements only | All cash inflows and outflows |
| Working capital treatment | Net change in NWC as one line item | Individual changes in each WC item |
| Purpose in CMA | Credit appraisal — funding pattern analysis | Statutory requirement under Companies Act |
| Basis | Changes in Balance Sheet between two years | Actual cash receipts and payments |
| Used by | Banks for CMA analysis | Auditors, investors, statutory reporting |
Sources of Funds — Detailed Breakdown
Sources of funds are inflows of long-term resources during the year:
Net Profit After Tax (PAT)
The primary internal source of funds. Retained profits increase net worth and fund business growth without external borrowing. Taken directly from Form II.
Depreciation (Non-Cash Add-Back)
Depreciation is a non-cash expense — it reduces profit on paper but no cash leaves the business. Adding it back to PAT gives true cash generated from operations. This is why DSCR also adds back depreciation.
Increase in Term Loan (New Drawdowns)
If new TL is borrowed during the year, the net increase (new drawdown minus repayments) is a source of funds. Use: Closing TL balance minus Opening TL balance (if positive = source).
Increase in Share Capital / Equity Infusion
Fresh equity brought in by promoters or investors during the year. For new businesses or expansion projects, this is often the primary long-term source alongside TL.
Decrease in Long-term Investments / Other Assets
If the business liquidates long-term investments or recovers long-term loans given to others, these are sources of funds in that year.
Uses of Funds — Detailed Breakdown
Uses of funds are deployments of long-term resources:
Capital Expenditure (Purchase of Fixed Assets)
The gross addition to fixed assets during the year — machinery, buildings, vehicles, equipment. Taken from the fixed asset schedule: Closing GFA minus Opening GFA = Additions (capex).
Increase in Net Working Capital (NWC)
As a business grows, it needs more working capital — more stock, more debtors. This increase in NWC is funded from long-term sources (not from CC). NWC = TCA − (CL excl. bank borrowings). An increase in NWC = use of funds.
Repayment of Term Loans
Principal repaid during the year on existing term loans. Note: this is separate from the TL interest charge (which goes through P&L). Only principal appears as a use of funds in Form VI.
Dividend Payments
If the business distributes profit as dividends to shareholders, that cash leaves the business — it is a use of funds. For most MSMEs and private companies, dividends are rare.
Increase in Long-term Investments
If the business invests in subsidiaries, FDs as margin money, or other long-term assets, this is a use of funds.
Net Working Capital Change — The Tricky Part
The change in Net Working Capital (NWC) is the most commonly mis-computed item in Fund Flow. NWC is:
Change in NWC = Closing NWC − Opening NWC
If positive → Increase in NWC → Use of Funds
If negative → Decrease in NWC → Source of Funds
A growing business typically shows an increasing NWC year-on-year — more sales means more stock and debtors, which need to be financed. This increasing NWC must be funded from long-term sources (PAT + equity + TL) — not from the CC limit, which is meant only for the short-term working capital gap.
Worked Example
| Item | Year 1 (₹L) | Year 2 (₹L) |
|---|---|---|
| Sources of Funds | ||
| Net Profit After Tax | 28.00 | 38.00 |
| Add: Depreciation | 15.00 | 13.50 |
| Increase in Term Loan | 60.00 | — |
| Equity Infusion by Promoter | 20.00 | — |
| Total Sources | 123.00 | 51.50 |
| Uses of Funds | ||
| Capital Expenditure (New Machinery) | 90.00 | — |
| TL Principal Repayment | — | 12.00 |
| Increase in Net Working Capital | 33.00 | 39.50 |
| Total Uses | 123.00 | 51.50 |
In Year 1: ₹60L TL + ₹20L equity + ₹43L internal accruals = exactly funds the ₹90L capex and ₹33L NWC increase. Balanced. In Year 2: only internal accruals (PAT + dep) are the source, used for TL repayment and NWC growth.
Reconciliation — Sources Must Equal Uses
Total Sources = Total Uses for every year. If they don't balance, there is an error in one of:
- NWC change computation (most common error)
- TL movement — mixing up gross drawdown with net change
- Depreciation — using IT Act rate instead of Companies Act rate
- Dividend — declared but not included as a use
- CWIP movement — assets transferred from CWIP to FA not reflected correctly
A balanced Fund Flow is a strong signal of CMA quality — it tells the credit officer that all the statements are properly interlinked and the preparer knows what they are doing.
What Banks Look for in Fund Flow
Banks analyse Form VI to detect three specific patterns:
1. Long-term Assets Funded from Short-term Sources
If capex appears in "Uses" but there is no corresponding TL or equity in "Sources" — meaning the capex was funded from CC — the bank will classify this as diversion of working capital funds. This is a serious compliance issue that can lead to NPA classification.
2. NWC Declining While Revenue Grows
If sales are growing but NWC is shrinking, the business is stretching creditors beyond sustainable limits or delaying payments — a liquidity risk signal.
3. Heavy Dividend Outflow with Weak NWC
If promoters are extracting dividends while the business needs working capital support, the bank sees this as promoters prioritising personal gains over business health.
Red Flags That Trigger Queries
- Fund Flow doesn't balance — Automatic query; seen as a preparation error or data inconsistency
- Capex funded without corresponding TL or equity — Implies CC diversion
- NWC requirement growing faster than equity + profit accruals — Suggests over-trading risk
- Large "other" items in sources or uses with no explanation — Bank will ask for breakdown
- Depreciation not matching Form II or asset schedule — Data inconsistency
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Form VI Fund Flow is generated automatically from your Form II and Form III inputs — no manual entry required. Sources and uses are reconciled automatically.
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