What it means
When a business raises money or plans a new budget, everyone wants to know where every pound 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 the coin to sources of funds, which details where the money came from in the first place. For non-finance managers, understanding this concept is vital when pitching for internal budgets or external loans.
Lenders and company directors will never hand over cash without a strict plan. They need to see that your spending targets will generate a return.
Vague categories like general operations will raise red flags immediately. In practice, this 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. Long-term investments usually cover capital expenditure, such as buying machinery or upgrading software.
Tracking your use of funds also helps with day-to-day accountability. Once the money arrives, managers must compare actual spending against the original plan.
If a project costs more than expected, or if funds are diverted elsewhere, it creates friction with financial backers and can derail the entire business strategy.
In practice
Real-world examples.
Example
TechStart secured a 50,000 pound bank loan. Their use of funds allocates 30,000 pounds for software development, 15,000 pounds for digital marketing, and 5,000 pounds for legal fees.
Example
GreenLeaf Café raised 20,000 pounds from a local investor. Their use of funds dedicates 12,000 pounds to commercial kitchen equipment, 5,000 pounds for initial stock, and 3,000 pounds for working capital.
Example
Apex Logistics received a 100,000 pound expansion grant. Their use of funds assigns 70,000 pounds to buy a delivery van, 20,000 pounds for staff training, and 10,000 pounds for insurance.
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:
If a business raises 80,000 pounds, the spending plan must equal that exact amount.
Working Capital = 20,000 pounds
Equipment = 50,000 pounds
Reserve Fund = 10,000 pounds
Total Use = 20,000 + 50,000 + 10,000 = 80,000 pounds.Case study
Seen in the real world.
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 pound 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 pounds down into clear categories. She allocated 18,000 pounds for office refurbishment, 12,000 pounds for ergonomic workstations and high-spec computers, 7,000 pounds for marketing to local businesses, and 3,000 pounds as a cash buffer for initial utility bills.
The bank manager reviewed the plan and approved the loan within a week because every pound 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 pounds under budget, she formally reallocated that surplus to marketing, keeping the bank fully informed. This transparency built immense 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.
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