What it means
When a business raises money or plans a new budget, everyone wants to know where every dollar will go. The use of funds section answers this by listing specific categories of spending, such as hiring staff, buying equipment or paying off existing debts.
It is the flip side of sources of funds, which details where the money came from in the first place. For non-finance managers, this matters when pitching for internal budgets or external loans.
Lenders and company directors will rarely hand over cash without a clear plan, and they need to see that your spending will generate a return. Vague categories like general operations raise red flags immediately.
In practice, the process involves mapping out both short-term needs and long-term investments. Short-term needs might cover working capital to pay suppliers while waiting for customer payments, while long-term investments usually cover capital expenditure, such as machinery or software upgrades.
Tracking your use of funds also helps with accountability. Once the money arrives, managers must compare actual spending against the original plan, because a project that costs more than expected, or funds diverted elsewhere, creates friction with financial backers and can derail the strategy.
Think of the use of funds like packing for a long holiday with a strict list. Before you leave, you write down exactly how much of your holiday budget goes on flights, accommodation and food, so you do not run out of cash halfway through the trip.
In practice
Real-world examples
Example 1
TechStart secured a $50,000 bank loan. Its use of funds allocates $30,000 for software development, $15,000 for digital marketing and $5,000 for legal fees. The plan adds up to exactly $50,000, and the bank asks for quarterly updates to compare actual spending with this plan.
Example 2
GreenLeaf Cafe raised $20,000 from a local investor. Its use of funds dedicates $12,000 to commercial kitchen equipment, $5,000 to initial stock and $3,000 to working capital. The investor can see that 60% of the money goes into long-lasting equipment that will support the business for years.
Example 3
Apex Logistics received a $100,000 expansion grant. Its use of funds assigns $70,000 to buy a delivery van, $20,000 for staff training and $10,000 for insurance. The grant provider requires receipts for each category, so the finance team keeps a separate ledger code for each line.
Think of it
Think of the use of funds like packing for a long holiday with a strict shopping list. Before you leave, you write down exactly how much of your holiday budget goes on flights, accommodation, and food, so you do not run out of cash halfway through the trip.
Formula
Calculation
Total Funds Raised = Total Use of Funds
Example 1:
A business raises $80,000, so the spending plan must equal that exact amount.
Working Capital = $20,000
Equipment = $50,000
Reserve Fund = $10,000
Total Use = 20,000 + 50,000 + 10,000 = $80,000
Example 2 (percentage allocation):
Working Capital = 20,000 / 80,000 = 25%
Equipment = 50,000 / 80,000 = 62.5%
Reserve Fund = 10,000 / 80,000 = 12.5%
Total = 25% + 62.5% + 12.5% = 100%
Lenders often look at these percentages to see whether most of the money goes into productive assets rather than overheads.
Example 3 (after fees):
If the lender takes a $2,000 arrangement fee from the $80,000, only $78,000 is available, so the plan must be trimmed, for example by reducing the reserve fund to $8,000.Case study
Seen in the real world
This is a fictional, illustrative scenario. BrightView Design, a small graphic design agency, wanted to expand its office space to take on larger corporate clients. They approached their bank for a $40,000 business loan. To secure the funding, the director, Sarah, prepared a detailed use of funds document. Instead of asking for a lump sum for general growth, Sarah broke the $40,000 down into clear categories.
She allocated $18,000 for office refurbishment, $12,000 for ergonomic workstations and high-spec computers, $7,000 for marketing to local businesses, and $3,000 as a cash buffer for initial utility bills. The bank manager reviewed the plan and approved the loan within a week because every dollar had a clear, justified purpose. Over the next six months, Sarah tracked her actual spending against this list. When the office refurbishment came in $1,000 under budget, she formally reallocated that surplus to marketing, raising it from $7,000 to $8,000 and keeping the bank fully informed. This transparency built trust and helped BrightView secure a second phase of funding the following year.
Watch out
Common mistakes
- Using vague descriptions like miscellaneous or general expenses instead of specific line items.
- Failing to match the total use of funds to the exact amount of money raised.
- Ignoring the plan once the money arrives and spending without tracking variances.
Questions
People also ask
How detailed does a use of funds breakdown need to be?
It should be detailed enough for a third party to understand exactly what they are paying for. Group major costs into clear categories with realistic cost estimates.
What happens if my actual spending differs from the plan?
Minor variances are normal, but significant changes require discussion. If you need to shift money between major categories, inform your investors or finance team immediately.
Is the use of funds only used when borrowing money?
No, it is equally useful for internal budgeting, grant applications, and equity fundraising to ensure every department uses its allocation wisely.