The following points highlight the six uses of funds in financial analysis.
Sometimes the result of trading in a certain year is a loss and some funds are lost during that period in trading operations 1 Such loss of funds in trading amounts to an outflow of funds and are treated as an application of funds.
If during the year any preference shares are redeemed, it will result in the outflow of funds and is taken as an application of funds. When the shares are redeemed at premium or discount, it is the net amount paid (including premium or excluding discount, as the case may be). However, if shares are redeemed in exchanges of some other type of shares or debentures, it does not constitute an outflow of funds as no current account is involved in that case.
In the same way as redemption of preference share capital, redemption of debentures or repayment of loans also constitutes an application of funds.
When any fixed or non-current asset like land, building, plant and machinery, furniture, long-term investments, etc. are purchased, funds outflow from the business. However, if fixed assets are purchased for a consideration of issue of shares or debentures or if some fixed asset is exchanged for another, it does not involve any funds and hence not an application of funds.
Payments of dividends and tax are also applications of funds. It is the actual payment of dividend (may be interim dividend) and tax which should be taken as an outflow of funds and not the mere declaration of dividend or creating of a provision for taxation.
Any payment or expense not related to the trading operations of the business amounts to outflow of funds and is taken as an application of funds. The examples could be drawings in case of sole trader or partnership firms, loss of cash, etc..