What is a Use of Funds Statement and what is its purpose?

A Use of Funds Statement, also known as a Statement of Cash Flow, is a financial report outlining how a company utilizes its financial resources over a time period. This statement details the various inflows and outflows of cash and how these funds are employed in business activities such as operations, investments, and financing.

A well-crafted statement will provide insight into the following areas:

1. Understand Liquidity: The primary purpose is to assess the company's ability to generate cash from its core activities and how it manages liquidity.

2. Tracking Expenditures: It tracks the company's expenditures, showing exactly how much cash is spent on operating activities, investing activities (buying assets), and financing activities (like repaying loans or paying dividends).

3. Planning and Decision Making: It helps investors, management, and other stakeholders understand how the company's cash is being managed, guiding investment decisions and operational strategies.

A Use of Funds Statement is typically required by investors when a company raises equity. Here’s why:

1. Transparency: Investors want to know how the newly raised funds from the equity offering will be used. This statement provides a detailed breakdown of whether the funds will go into gaining market share, expanding operations, paying down debt, purchasing assets, or other activities.

2. Risk Assessment: It helps investors assess the company’s liquidity and ability to generate cash from operations. This is crucial because investors need to be confident that the company can manage its new capital effectively.

3. Regulatory Requirement: Many regulatory frameworks and financial reporting standards mandate the inclusion of a cash flow statement as part of a company’s financial disclosures. For example, in most major markets, companies that issue public equity are required by law to provide full financial statements, which include the Statement of Cash Flows.

So, investors use this document to evaluate how well a company manages its resources and how efficiently it is expected to use the new capital.