What it means
A profit figure tells you whether trading went well, but it does not tell you how the business was funded or what it bought. A flow of funds statement fills that gap by listing every source of finance during a period and setting it against every use.
Sources include profits earned, depreciation added back, new borrowing, new share capital and cash from selling assets. Uses include buying equipment, repaying loans, paying dividends and putting more money into working capital such as stock and receivables.
The discipline of the format is what makes it useful. Because sources and uses must reconcile to the change in cash, nothing can hide, and a business that funded long-term assets with short-term borrowing is exposed immediately.
Modern reporting mostly replaced the formal flow of funds statement with the cash flow statement, which splits movements into operating, investing and financing. The underlying logic is identical, and many analysts still build a simple sources-and-uses view because it is easier for non-specialists to read.
There is a second, quite different use of the phrase. Central banks and statistical agencies publish flow of funds accounts that show how money moves between sectors of an economy, which economists use to spot rising household debt or shifts in corporate borrowing.
Bankers use the same idea in a forward-looking way when assessing a loan. A sources-and-uses table in a credit application shows exactly which pot of money will repay the debt, and a lender who cannot see that pot will usually decline.
In practice
Real-world examples.
Example
A restaurant group's board sees profit of $900,000 but almost no cash increase. The flow of funds statement shows $650,000 went into fitting out two new sites and $300,000 into loan repayments, which settles the debate in one page.
Example
A lender reviewing a $2,000,000 equipment loan asks for a sources and uses table. The applicant shows $400,000 of owner equity, $1,600,000 of new debt and a matching $2,000,000 of machinery purchases, which makes the funding structure immediately clear.
Example
An economist studying household finances uses national flow of funds accounts to show that mortgage borrowing grew faster than deposits for three straight years, and flags the widening gap in a quarterly commentary.
Formula
Calculation
Total sources - Total uses = Net increase or decrease in cash
A distribution company prepares a flow of funds statement for the year.
Sources:
Net profit after tax $420,000
Depreciation added back $180,000
New long-term bank loan $500,000
Proceeds from selling old vans $60,000
Total sources = $420,000 + $180,000 + $500,000 + $60,000 = $1,160,000
Uses:
Purchase of new warehouse racking and vehicles $700,000
Dividends paid $150,000
Repayment of an older loan $200,000
Increase in working capital $90,000
Total uses = $700,000 + $150,000 + $200,000 + $90,000 = $1,140,000
Net increase in cash = $1,160,000 - $1,140,000 = $20,000
The statement shows the business generated $600,000 internally, from profit plus depreciation, and borrowed a further $500,000 to fund $700,000 of asset purchases. Cash barely moved, which is a very different story from the one the $420,000 profit figure tells on its own.Case study
Seen in the real world.
Brackenmoor Garden Supplies is a fictional retailer used purely as an illustrative case. Its owners were pleased with a record $780,000 profit and were surprised when the bank refused to extend the overdraft. Nothing in the profit and loss account explained the refusal.
The bank's analyst had built a flow of funds view. It showed $780,000 of profit plus $220,000 of depreciation, so $1,000,000 generated internally, against $1,450,000 of uses: $600,000 for a new site, $350,000 in dividends, $200,000 of loan repayments and $300,000 absorbed by a jump in seasonal stock. The $450,000 gap had been funded entirely by the overdraft, which is short-term money paying for long-term assets.
Brackenmoor responded by cutting the dividend for one year and refinancing the new site with a five-year loan matched to the asset's life. The illustrative lesson is straightforward: profit says nothing about funding structure, and the flow of funds statement is where that structure becomes visible.
Watch out
Common mistakes.
- Treating depreciation as a source of cash in its own right. It is added back only because it reduced profit without any money leaving the business, not because it generates funds.
- Leaving working capital changes out of the statement. Money absorbed by extra stock and slower-paying customers is a genuine use of funds and is often the largest single item.
- Assuming a positive net figure means all is well. A business can show rising cash while funding it entirely with new borrowing, which the sources column reveals at a glance.
Questions
People also ask.
Is a flow of funds statement the same as a cash flow statement?
They share the same logic, but the cash flow statement is the formal reporting standard split into operating, investing and financing, while flow of funds is the simpler sources-and-uses presentation.
Do sources and uses always balance exactly?
Yes, once the change in cash is included as the balancing figure, because every dollar raised must be either spent or still held.
Why do lenders ask for sources and uses?
Because it shows precisely how borrowed money will be spent and which cash stream will repay it, which is the core of any credit decision.
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