Understanding Funds Flow in M&A Transactions

Funds Flow in M&A

What is funds flow M&A?

Funds flow in M&A refers to the movement of financial resources in the company being acquired — both the origins and uses or applications of funds. The acquiring company will typically analyze the flow of funds during the due diligence phase as a way to determine the financial viability and cash flow dynamics of the target company.

What is a fund flow statement?

A fund flow statement is a financial report documenting the movement of funds within an organization during a given period. The statement covers both the sources of funding — such as company operations, loans, or share purchases — and the funds’ applications (such as acquiring equipment or paying off debts).

Flow of funds statements are a key element in financial reporting as a whole. They both serve as a gauge to the overall financial health of a company and provide stakeholders with insight into the company’s fund flow dynamics.

In M&A transactions, fund flow statements are an essential part of the due diligence process, helping the buy side form a clear picture of the target company’s financials. 

What goes into a fund flow statement?

A flow of funds statement analyzes a company’s working capital — that is, its assets and liabilities within an established time frame. Assets include a company’s cash supply, receivables, and inventory. Liabilities include payables, such as loans.

The fund flow statement aims to find the resulting difference between the sum of a company’s assets and liabilities — that’s the company’s net working capital. 

To determine present net working capital, the statement will typically include the following segments:

  • Opening balance of funds: Details the funds available at the start of the established accounting period.
  • Sources of funds, including:
    • Cash inflow from operations — that is, funds generated by the company’s main business activities
    • Cash flow from financing — that is, funds raised from activities such as raising shares or taking loans
  • Uses of funds, including:
    • Cash outflows for operating activities, such as payments for operational company expenses
    • Cash outflows for investment, including cash used for acquiring assets such as equipment, real estate, investments, or other acquisitions
    • Cash outflows for financing activities, including funds used to repay debts or dividends
  • Net working capital: Difference between sources and uses of funds.
  • Closing balance: The amount of funds at the end of the accounting period, calculated by adding the net change in funds to the opening balance.

Who is responsible for creating a fund flow statement in M&A?

In an M&A transaction, the target company (or sell side) is typically the one to issue the fund flow statement. Specifically, the target company’s management or financial department will prepare the statement, which will then be reviewed by the acquiring company (buy side) as part of the due diligence phase.

Who is a fund flow statement for?

As it documents the exact sources and applications of funds flowing through a company, the statement is key for providing transparency and accountability. As such, it’s a document of interest to all company stakeholders, including potential buyers, analysts, and investors.

In an M&A transaction, the fund flow statement is issued for the benefit of the buy side. It’s typically provided during the due diligence period, after a letter of intent (LoI) has been signed, and can be protected by a non-disclosure agreement (NDA).

After receiving it, the buy side analyzes the statement with a view to understanding the target company’s financial health and practices — how funds are generated and allocated, what are recent trends in business operations, investment, financing, and so on.

What time span does a fund flow statement cover?

Typically, a fund flow statement covers the entirety of a company’s fund flows within the previous fiscal year. However, it can also cover the past quarter or other fiscal period, given the reporting practices and needs of the organizations involved.

What are the main objectives of a fund flow statement?

As we saw above, fund flow statements are an important way to account for a company’s operational and financial developments within the time frame in question. In a few words, the statement ensures transparency and helps stakeholders form a clear picture on the ins and outs of the business.

More specifically, some of the main objectives of a fund of flows statement include:

  • Tracking the sources and uses of funds within the target organization
  • Understanding the business’ cash flow dynamics and evaluating its financial health
  • Identifying changes in working capital and analyzing recent trends in company operations
  • Understanding the target company’s operational efficiency as an aid to strategic planning

What is the difference between a fund flow statement and a cash flow statement?

Alongside balance sheets and income statements, fund flow and cash flow statements are the main financial statements used for reporting on an organization’s financial performance and situation. And while it’s not unusual for cash and fund flow statements to be confused, we should emphasize they play very different roles in assessing a company’s finances.

Cash flows statements

A cash flow financial statement only reflects the cash aspect of a company’s assets — cash receipts and cash payments in a given financial period. As such, it’s mainly concerned with assessing factors such as company liquidity, solvency, and ability to meet financial obligations (including paying dividends to shareholders and paying off debt.)

Cash flow statements are a key accounting document that investors will typically keep their eyes on.

Fund flow statements

A fund flow statement, on the other hand, is more all-encompassing. It includes cash flows, but also factors in other assets such as a company’s inventory and receivables — i.e., future cash flows such as expected loan payments and tax refunds.

Fund flow statements are above all about full accountability. They paint a complete picture of where companies receive funds from, and where these funds are being applied. As such, they’re particularly useful for potential buyers who might want to understand all the responsibilities, debts, and earnings that they would assume upon acquiring a business.

The below table provides a summary of the differences between cash and fund flow statements.

Cash Flow StatementFund Flow Statement
PurposeTracks cash inflows and outflowsTracks movement of funds
ScopeFocuses on cash transactionsIncludes cash as well as fixed assets
ComponentsOperating, financing, and investing activitiesSources and uses of funds
Short vs long-term focusEmphasizes immediate cash position, net incomeAnalyzes long-term assets and funds movement
Liquidity emphasisHighlights cash availabilityExplores fund origins and allocations
Financial healthAssesses cash liquidity and solvencyEvaluates overall financial health
Investor/buyer insightShows cash generation, management, and how much cash a company hasReveals sources and uses of funds
AcquisitionsNot tailored for M&A evaluationUsed to evaluate M&A due diligence
PurposeManaging daily operations, assessing liquidity, budgetingEvaluating financial health, understanding capital structure

What is a funds flow memorandum?

A funds flow memorandum is sometimes issued by the selling company before closing the deal. The memorandum includes all of the payment and wire instructions for payments made at the end of the transaction. 

Common wire transfers made at the closing of the deal include to the seller and to third parties on behalf of the target company — such as paying off debt, taxes, and transaction expenses.

Flow of funds template

You can see a simplified example of a flow of funds template below:

Fund Flow Statement
Opening balance$50,000
Increase in current assets$20,000
Decrease in non-current assets-$10,000
Cash inflows from operations$120,000
Cash inflows from financing activities$30,000
Total sources of funds$190,000
Decrease in current liabilities-$15,000
Increase in non-current liabilities-$25,000
Provision for tax-$10,000
Proposed dividend-$20,000
Total applications-$70,000


Flow of funds statements detail all of the sources and applications of the company’s funds during a fiscal year or similar period, providing stakeholders such as the buyer, lenders, or shareholders with a clear understanding of the business’ networking capital.

In M&A due diligence, which demands a careful and thorough examination of the target company’s financials, the flow of funds statement is one of the key documents provided by the seller to the buyer. The statement will help the buying company assess the overall financial strength of the target company, while at the same time disclosing a complete list of due receivables and payables that the acquiring side will incur.

Alongside a company’s balance sheet, income statement, and cash flow statement, the flow of funds statement is one of the main types of financial statements for understanding a company’s financials.


Ronald Hernandez

Founder, CEO at dataroom-providers.org

Data room selection & optimization expert with 10+ years of helping companies collaborate more securely on sensitive documents.

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