A funds flow statement may not be as well-known as a cash flow statement, but it is an important document, especially due diligence process in M&As. The fund flow statement tells about the changes in the financial standing of a business. It shows where the money comes from and how the company spends it. Accurate fund flow management helps identify financial risks, ensures proper payment to stakeholders, and supports smooth integration after an M&A deal.
In this article, you will learn about what a funds flow statement is, why it is important in M&As, and best practices for preparing the statement.
What is Funds Flow in M&A?
A fund flow statement is a financial report that outlines the movement of funds within a business over a certain period. It identifies two important elements related to business funds:
- Sources of funds. It includes operational income, loans, or capital raised through equity.
- Uses of funds. It includes asset purchases or debt repayment.
This statement is essential for understanding the overall financial health of a company.
Funds Flow in M&As
Funds flow in M&As means how the money moves within the target company. This includes both where the money comes from and how it is used. The acquiring company closely examines this flow during the due diligence phase to assess the target company’s financial strength and how it manages cash and resources. Fund flow statements are crucial in helping the buying company understand what financial responsibilities and assets it would inherit.
The Cash Flow Statement and Funds Flow Statement are not the Same
Cash and funds flow statements are used with other key financial records, like the balance sheet and income statement, for a clearer picture. It is important to note that these statements serve different purposes.
Cash Flow Statement
A cash flow statement only focuses on cash transactions. It records the money coming in and going out within a set period. The statement highlights liquidity and the company’s capacity to meet immediate financial obligations. This makes it an important tool for investors to track how well a company can manage its day-to-day finances.
Funds Flow Statement
A fund flow statement gives a broader financial view of the company. It includes not only cash but also non-cash items like inventory and accounts receivable of the target company. The statement offers insight into the full movement of financial resources. This makes it especially relevant for evaluating long-term strategy and capital structure. The cash flow statement helps reveal
- Current financial strength
- Pending liabilities and revenues
- Strategic investments they would be taking on
Components of a Funds Flow Statement
A funds flow statement has four key components.
1. Sources of Funds
Sources of funds include the ways a company brings money into the business in a given time frame. These may include obtaining loans and issuing new shares. Each method injects fresh capital, often used for business growth. Selling long-term assets, such as property or investments, can also generate cash. However, this method is not considered reliable in the long term.
Another important source is operating income. This is calculated by adjusting net profit for non-cash items like depreciation or gains and losses that are not part of regular business activities.
2. Uses of Funds
Uses of funds are the areas where the business spends or allocates its money. Common uses include buying fixed assets like machinery or real estate, which help expand the business but tie up financial resources.
Another use is the repayment of long-term borrowings, which reduces debt but also decreases available capital. Paying dividends or repurchasing shares are also considered uses of funds. These actions return value to shareholders but lower the amount of money kept in the business.
3. Net Working Capital
Net working capital is the difference between current assets and current liabilities. Changes in NWC show shifts in short-term financial stability. An increase in NWC usually indicates better liquidity, while a decrease may point to potential financial pressure.
4. Opening and Closing Balances
These balances show the financial condition of a company at the beginning and end of the reporting period. They help evaluate how well the business manages its resources and reflect any overall financial improvements or declines.
Importance of Flow of Funds in M&A Transactions
Tracking the movement of funds is vital to a successful M&A transaction. Here is why funds flow analysis is important in mergers and acquisitions.
1. Role in Due Diligence Process
Due diligence is the detailed review process that happens before the completion of an acquisition or merger. The acquiring company uses this phase to uncover any financial, legal, or operational risks.
The funds flow statement is a key document in this stage as it offers a detailed look at how the target company handles its finances. It helps buyers understand:
- Whether the target company funds its operations sustainably or depends heavily on debt.
- The reliability of earnings, distinguishing between real cash flow and non-cash profits.
- Long-term capital trends and any warning signs around liquidity.
If reported profits do not match actual cash flow, it may reveal issues like overstated revenue or hidden debts.
Using a data room for M&A due diligence helps speed up the process and makes data sharing faster. Data rooms are online document repositories specifically designed to ensure safe and faster M&As.
2. Ensuring Transparency and Accountability
A clear view of financial activity builds trust in M&A. The statement improves transparency by showing how money has moved in and out of the business, including:
- Cash from operations, investments, and financing
- Transactions with related parties
- Unusual or one-time financial events
This detailed view reduces misunderstandings and provides a financial trail that can be reviewed or audited if needed. It also supports compliance with regulatory rules, especially in industries that require businesses to monitor fund movement strictly.
3. Facilitating Smooth Deal Closures
A well-prepared statement plays a crucial role in ensuring that mergers and acquisitions proceed smoothly. It allows the acquiring company to make informed decisions and avoid unexpected issues later in the process. The funds flow statement also helps buyers in the following ways.
- A clear understanding of the target company’s fund movements helps the buyer structure payment terms.
- Insights from the funds flow statement help the acquiring company prepare for integration.
- Addressing financial concerns ahead of time lowers the risk of disruptions during or after closing.
Drafting a Funds Flow Memorandum
The following are the key sections of a detailed funds flow statement.
Description of the Transaction ›
- Provide a brief summary of the transaction’s purpose.
- Mention any related legal agreements or deal documents.
- Clarify the type of transaction (e.g., acquisition, funding, or joint venture).
Sources of Funds ›
- List all parties providing money (individuals, lenders, banks, etc.).
- Specify how much each party is sending.
- Clearly state the method of payment (e.g., wire, check).
Uses of Funds ›
- List each party receiving funds and the exact amount.
- Include detailed banking information such as:
- Account number
- Routing/ABA number
- SWIFT code (if international)
- Beneficiary details
- Outline payment conditions if applicable.
- Specify method of transfer (e.g., wire, PayPal, check).
Banking and Wire Transfer Details ›
- Verify all banking information with receiving parties beforehand.
- Allow partial disclosure if needed for privacy.
- Clarify responsibility for delays due to errors.
Payment Confirmation ›
- Instructions for wire confirmation numbers.
- Include sample language to avoid disputes.
- Inform receiving party where and how to confirm.
Contact Persons ›
- List contacts for sending and receiving parties.
- Include phone numbers and email addresses.
Signatures ›
- Signature blocks for all parties.
- Allow PDF, fax, or electronic signatures.
- Ensure exchange of fully signed copies.
Additionally, here are some of the best practices and mistakes to avoid when preparing a funds flow memorandum.
Best Practices for Creating a Funds Flow Statement
- Verify all banking details with the receiving parties before finalizing.
- List all sources and uses of funds with accurate amounts and responsible parties.
- Make sure payment and wire instructions are correct.
- Clearly outline the payment sequence, especially for conditional or sequential transfers.
- Involve legal and financial advisors in reviewing the statement for accuracy and compliance.
- Include contact persons and confirmation instructions for troubleshooting.
Mistakes to Avoid When Making a Statement of the Flow of Funds
- Failing to assign clear points of contact makes it difficult to resolve errors quickly.
- Skipping legal review, which may result in legal or tax issues later.
- Missing key participants or amounts, creating gaps in fund distribution.
- Not specifying the order of payments, confusing execution.
Funds Flow Statement vs. Cash Flow Statement
As mentioned earlier, a statement of cash flows includes cash transactions, while a funds flow statement also considers non-cash items. Here are some other key differences between them.
| Criteria | Cash Flow Statement | Fund Flow Statement |
|---|---|---|
| Main Purpose | Tracks cash outflows and inflows | Tracks the overall movement of funds |
| Scope | Focuses only on actual cash transactions | Includes both cash and non-cash items like assets and liabilities |
| Key Components | Operating, investing, and financing activities | Sources and uses of funds |
| Time Focus | Highlights short-term cash position and liquidity | Focuses on long-term fund movements and capital changes |
| Liquidity Emphasis | Measures available cash for immediate obligations | Analyzes how funds are sourced and allocated |
| Financial Health View | Assesses cash solvency and liquidity | Provides a broader view of financial structure and health |
| Relevance to Investors | Shows cash generation and operational efficiency | Reveals long-term obligations and capital application |
| Use in M&A Transactions | Not specifically designed for M&A analysis | Often used during due diligence in acquisitions |
| Common Uses | Budgeting, liquidity management, and short-term planning | Assessing capital structure, strategic decisions, and investments |
A cash flow statement is handy in assessing a company’s liquidity, operational cash generation, and short-term financial health. This statement is crucial during screening, due diligence, and post-deal planning.
On the other hand, the funds flow statement evaluates long-term capital movements, financial structure, and obligations, which is crucial for deal structuring and integration planning.
Funds Flow in an M&A Deal
A well-structured funds flow is critical to the successful execution of any merger or acquisition. It ensures that all parties — especially the buy-side — have a clear understanding of where funds are coming from, how they will be allocated, and when each payment must occur. This transparency is essential to prevent funding gaps, miscommunication, or last-minute delays at closing.
In a typical M&A transaction, the total funds required at closing extend beyond just the purchase price. They may include working capital adjustments, transaction fees, escrow funding, debt settlements, and advisor compensation. The buy-side is responsible for coordinating these payments and ensuring all capital sources are properly allocated.
Funding sources often include:
- Direct contributions from the buy-side
- Senior debt from banks or financial institutions
- Mezzanine or subordinated financing
- Equity or capital from executives or investors
A detailed funds flow statement brings these components together into a single, actionable document. It serves as the financial roadmap for the deal, aligning all stakeholders — legal, financial, and operational — on the exact structure and sequencing of payments.
For the buy-side, a clear funds flow is more than just administrative — it is a strategic tool that ensures deal certainty, protects against execution risk, and builds trust with the seller and financing partners.
Read more about recent M&A deals: M&A Trends 2025: Key Insights from Upcoming and Recent M&A Deals
Additional Considerations in Funds Flow M&A
In complex transactions, especially those involving international flow of funds, it’s important for both parties to understand and document how capital crosses jurisdictions. Regulatory compliance, currency conversion, and tax exposure all influence how the flow of funds M&A process is structured. A well-prepared funds flow diagram can help visualize the transaction path, clarify timing, and ensure that no payment obligations are missed.
For investors and finance teams, funds flow forecasting plays a crucial role in pre-deal planning. This process involves modeling expected cash receipts, anticipated outflows, and capital allocation strategies during and after the acquisition. It helps assess whether the company’s balance sheet can support the deal and meet future financial goals.
In the context of private equity, the funds flow statement is especially valuable. These firms often manage multiple capital sources and investor relationships. Clear documentation of how they receive funds, deploy them, and return capital ensures transparency and helps support the flow of funds from investors to companies and institutions efficiently.
Ultimately, a comprehensive M&A flow of funds statement does more than meet a closing checklist — it provides details about the flow of funds from operating, investing, and financing activities, offering a complete financial picture that aligns short-term execution with long-term strategy.
Funds Flow M&A: Key Takeaways
A funds flow statement:
- Enhances due diligence by revealing how the target company sources and uses funds, which helps identify hidden risks like unsustainable debt or liquidity issues.
- Improves transparency and accountability, which offers a clear financial trail that reduces misunderstandings and supports regulatory compliance.
- Supports accurate payment structuring at closing to ensure all stakeholders (e.g., lenders, advisors, tax authorities) are paid directly to avoid post-deal liabilities.
- Informs integration and strategic planning by highlighting long-term capital movements and shifts in working capital, which helps in financial alignment post-acquisition.
