Firm’s Cumulative Capital Requirement Lines A, B, and C show alternative amounts of long-term finance. Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for remainder Strategy C: A permanent short-term borrower A B C Year 2 Year 1 Rs Cumulative capital requirement Time
Financing of Working Capital Strategy A : Long term financing is used to meet fixed asset requirement as well as peak working capital requirement. When the WC requirement is less than the peak level, the surplus is invested in liquid assets (cash & marketable securities) Strategy B : Long term financing is used to meet fixed asset requirement, permanent WC requirement, and a portion of fluctuating WC requirement. During seasonal upswings, short term financing is used; during seasonal downswings, surplus is invested in liquid assets. Strategy C : Long term financing is used to meet fixed asset requirement and permanent WC requirement. Short term financing is used to meet fluctuating WC requirement.
Funds Flow statement Funds flow statement depicts the ways and reasons for the movement in the funds of an entity for a given accounting period. It includes changes in net working capital .
Funds Flow statement Funds flow statement can be drawn by analysing : • Cash from operations • Changes in Working Capital • Other sources / applications