June 18, 2017

The source of funds is the term used in the context of funds flow statement. It refers to inflow of cash or funds during a financial year into the company through various means, in order to understand more about sources of funds let’s look at various examples of sources of funds –

  1. The first and foremost example is the decrease in the net working capital where working capital is equal to current assets less current liabilities and if working capital has decreased then it would mean two things first is that either current assets have decreased or current liabilities has increased. If current assets has decreased then it means debtors has paid cash to settle debts or inventory has fallen due to the sales done by the company which results in inflow of funds to the company whereas if current liability has increased then it implies that sundry creditors or bills payables have increased which company has taken goods or cash from these people resulting in source of funds for the company.
  2. Another example is when a company issues equity or preference shares to the shareholders because when company issue capital in the form of equity or preference shares then it receives cash from prospective shareholders and that cash receipt from shareholders in the books of the company will be considered as a source of funds.
  3. When company take the loan from a bank or financial institution or issue debentures to public then also company receive cash and that cash received will also be considered as a source of funds even though it results in an increase in liabilities of the company.
  4. When the company sells old assets like building, land, plant and machinery, furniture and so on then also cash comes into the company and such sales done by the company will also come under sources of funds.
  5. Sale of various investments like fixed deposit, stocks, mutual funds done by the company is another example of sources of funds because when a company sells these investments they receive cash and cash coming into business will always be considered as the source of funds.

As one can see from the above that an inflow of cash or funds into the business will be treated as sources of funds even though it may result in a reduction in assets or investments and increase in liabilities in the form of bank borrowing or debentures.

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