The sources of bank funds are divided into two categories:
- Internal sources and
- External Sources
Internal sources of bank funds
Cash from operations is the main internal source. The Net Profit for this purpose will have to be adjusted for non-cash items, such as:
- Depreciation: Depreciation does not result in outflow of cash and, therefore, net profit will have to be increased by the amount of depreciation or development rebate charged in order to find out the real Chas generated from operations.
- Amortization of intangible assets: The amount written off should, therefore, be added back to profits to find out the cash from operations.
- Gains from sale of fixed assets: Since sale of fixed assets is taken as a separate source of fund, it should be deducted from net profit.
- Interests on long-term loans: Since such interest is to be shown as separate source o cash, it should be added back to net profit.
External sources of bank funds
There are number of external sources of funds. Funds may be secured either by an increase in liabilities or a decrease in assets as explained below:
- Increase in Share capital: The amounts to be raised by the issue of new shares or by calling the unpaid amount on the already issued shares are to be shown separately for equity shares and preference shares.
- Increase in Long-term Borrowing: Long-term borrowing such as issue of debenture, loans from different banks are sources of cash. They should be shown separately.
- Increase in Deferred Payment on Plant and Machinery: Plant and machinery may be purchased on deferred payment basis. The amount of such arrangement should, therefore, be shown as a source of funds during the concerned period.
- Sale of fixed assets, investment, etc.: It results in generation of cash and, therefore, is a source of cash.
- Increase in other current liabilities: Increase in other current liabilities, such as creditors, bills payable, outstanding expenses show that cash to the extent of increase in these liabilities has not gone out of the business though taken into account while finding out cash from operations. Such increase, therefore, has to be taken as a separate source of cash.
- Decrease in current assets: Decrease in current assets such as debtors, bills receivable etc., show that cash has been realized to that extent and, therefore, it is shown as a separate source of cash.
Related Content about bank fund:
- Various Uses of Banks Fund
- Bills Purchased and Discounted is Way of Employing the Bank Funds
- Management of Bank Fund
- Nature of Funds Flow and Cash Flow Statements
- What is Funds and Flow of Funds?
- How to Prepare Fund Flow Statement?