12. State of sources and applications of funds

Chapter 12




by josavere


If the executive has more elements of judgment, probability makes the right guess in the planning, execution, control, and diagnosis of any situation to the financier. As the sailor takes a compass to guide the ship, the management must tell on a precede-established plan that takes shape with projected financial statements: result statement, general balance sheet, source and application of funds, projection of cash flow, and projection of changes in the equity. 

As a complement, all the prognoses are due to prepare that basic support the financial statements and with special care, the projection of cash flow, the most important financial tool in the short term, because it is the mathematical end result of integration of the budgets of sales, production, raw materials, costs of manufacture, expenses of administration and sales, investments, and the ability to be capitalized like, research and development, qualification, publicity, etc. 

In this chapter, a very schematic presentation comes out of the projection of basic financial statements, because with them, the preparation of a masterful plan of value generation takes shape. In a previous chapter, we saw that it is a requirement to clearly understand the processing of the statement of resources and application of funds.


a. Sales: projected figures, considering the changes of prices in the prefixed dates; obviously talking about net sales.

b. Cost of sold merchandise: base on the set of inventories, the values projected for the raw materials and the precede-established policies by the management. It is worth the trouble to write down what's going to be the financial planning; it's recommendable always to work with the direct cost, system that facilitates the making of the decision. In addition, the high costs incurred by inefficiency, expenses of administration and sales, and other expenses are due to inform, and, in addition, correlating them with the operation level and prepared budgets to take care of the demand.

c. Financial expenses: calculated after processing the projection of the cash flow. It is an excellent tool to study different alternatives using the spreadsheet.
d. Taxes: for its calculation, we must consider the specific conditions of the particular company and the effective tributary legislation. By arithmetic, we arrived at the expected profit, the amount that is going to be rejected in the equity increase, in the generation of funds, and that constitutes a short term goal for the management. Let us remember that the objectives of the management must be long term, to avoid that the stability of the company/ for the sake of an immediate result is sacrificed.
Long-term handling obeys more to general policies than to mathematical approaches and, therefore, it demands a greater quota of responsibility and maturity on the part of the management. In addition to the , good tools for the handling of the long term, there are towing other basic statements, whose preparation we illustrated in a brief way.




a. Cash and banks: the figure leaves the final balance that is obtained with the projection of the cash flow.

b. Accounts receivable: adding to the initial balance, the sales on credit, and reducing the considered collections (obviously, considering the recovery of slow portfolio and the possible delays of the period in which they are being budgeted).

c. Inventories: it is recommendable to separate the set in raw materials, products in-process, and finished, in the case of manufacturing companies. It is coming in the same way that in accounts to receive, but considering the amount of budgeted final inventory according to the policy drawn up.

d. Temporary investments: the data is obtained from the projection of cash flow.

e. Other current assets: it is coming from a similar way as the previous headings.

f. Fixed assets: to the initial set the amount defined in the budget of investments is added to it. Accrued depreciation calculates adding to the initial number the calculation for the period projected according to the method that the company uses to depreciate and considering the possible sale of assets.

B. LIABILITIES: as much for the balances of short as of long term the calculation is still simpler than for the assets because these are characterized to have Adelaide. The estimated is reduced to a problem of sum and subtractions.

Special care should be taken of one which has to do with the labor liabilities, which are due to consider base on the legal regime, or in the company policies. The actual calculation will give us a projection of the labor liabilities as far as retirement pensions, in case they appear in a company individually.

C. EQUITY: regarding the tried schematizing we could speak of the obtaining of the equity figures by the difference between assets and total liabilities. Of course, the discrimination of the equity is more recommendable considering the number of wait for, resulting in a profit of the projected statement of gains and losses and the policies of the company as far as dividends, the restrictions of the legal type, and the thought of the management.



After having the projection of the result statement and the general balance sheet, we are in conditions to considering the statement of resources and application of cash.
Let us clarify that in this chapter the statement of resources and application of cash, has an approach strictly financial and non-accountable and for this reason, we should leave that to the accountant. This tool will tell us where the cash was obtained from and how was it used.
It responds to a very common question but whose answer is not as simple as for example: what are you going to do with the money from the sale of the land? Aren't dividends going to be paid? Are they going to capitalize on the company? Why? etc.
The companies enter effectively by different aspects and all the cash arrive at the same funds where they lose their identity with a specific project. Although in the balance sheet in which the equity sets like legal reserve, for capitalization, future extensions, etc., it does not mean that the cash is in a certain bank, corporation, or a safe. The cash is invested in the different headings from the assets. The statement of resource and application of funds outlines this explanation.

SOURCE is an increase in a liability or any decrease in an asset. By antithesis, an APPLICATION will be the increase of an asset or the decrease of a liability. Although depreciation does not constitute cash income, it is treated as a source, since in the income statement it was subtracted from profits, as an element of the cost of merchandise sold for the period, specifically as part of general expenses. manufacturing, but does not actually constitute a cash outlay in that period; therefore, it is added to profit, as one of the so-called internally generated funds.


Regarding the principle of company in progress and the inflationary phenomenon, the companies require every day more work capital to take care of the projected increase of operations. The prognosis of the cash flow indicates

to us the additional requirements of the capital of work. Thus we must take the programming thus:

CT2 = AC2 - PC2

CT1 = AC1 - PC1

Reducing CT2 - CT1

D CT = CT2 - CT1 = [(AC2 - PC2) - (AC1 - PC1)] 

CT: capital of work projected period (2), bases (1)
AC: current assets projected period (2), base (1)
PC: current liabilities projected period (2), base (1)

D CT = required increase of the capital of work

Once determined the working capital (D CT), the financial planning begins properly as follows.

How one does prepares the state of resource and application of funds.

a. The additional needs of capital of work to settle down that is required (D CT), should start off in the right column of the balance sheet; the resources with the applications. In a certain way, we can simplify this as the cash that the company must invest for the next period to keep growing.

b. The awaited changes in the other items that need to be calculated, those that are not included in the capital of work. Applying the previously indicated guide we can tell if the change is a resource or an application.

c. The Statement sheet is prepared into two columns: to the left, resources, and to the right, applications.

d. We need to analyze emphasizing the application of the financial principle of compliance and later, on the defined plan that is to be followed to indicate any oriented actions to increase the value generation.




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