In financial accounting, “cash flow” refers to the statement of cash flows, a required report under generally accepted accounting principles (GAAP). This statement shows the inflow and outflow of actual cash (or cash-like assets) from operating, investing or financing activities. “Fund flow” has two different meanings, one for accounting purposes and one for investing purposes. Accounting-wise, it could be used in reference to the fund’s flow statement, which GAAP required from 1971 until 1987. Investing-wise, it refers to Investors and market analysts tracking the flow of funds in and out of various sectors of an economy or asset classes – the net fund flows for bonds during a certain month, for example.
Companies receive inflows of cash revenue from selling goods, providing services, selling assets, earning interest on investments, rent, taking out loans or issuing new shares. Cash outflows can result from making purchases, paying back loans, expanding operations, paying salaries or distributing dividends.
Since the Securities and Exchange Commission (SEC) requires all listed companies to use accrual accounting – which largely ignores the actual balance of cash on hand – investors and lenders rely on the statement of cash flow to evaluate a company’s liquidity and cash flow management. It is a more reliable tool than the metrics companies use to dress up their earnings, such as earnings before interest, taxes, depreciation and amortization (EBITDA).
When it was required, the statement of fund flow was primarily used by accountants to report any change in a company’s net working capital during a set period of time. Much of this information is now captured in the statement of cash flow.
The investing use of fund flow is more useful today. Here, overall investor sentiment can be gauged as it relates to different asset classes. If the flow of funds for equities is positive, for example, it suggests that investors have a generally optimistic view of the economy (or at least the short-term profitability of listed companies).