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What Are Funds?

The term "funds" has about the same meaning as "available cash."

Business people prefer the term funds when referring to money they designate or make available for a specific purpose. In most cases they could use the term "available cash," but they usually prefer to say "funds" instead. A project manager might say, for instance, "Our project has been funded" which means the same as "Money for our project is now in the budget."

Define Funds and Funding

In business, the term funds refers generally to a pool of financial resources availafble for near-term use, usually for a designated purpose. Funding is the act of ensuring that the given amount is available for the given purpose.

The organization's funds include cash on hand, available for immediate use, of course but also other liquid assets that will become cash in the near term. Thus, "funds" has about the same meaning as "available cash."

Funds With Near-Certain Future Availiability

Funds for use may also refer to money not yet available to the user, but which very likely will be available soon.

  • Soon-to-be available funding may come from an external source, such as funds from a government grant.
  • Funds with near-certain future availability may come from an internal source, such as sinking fund the firm creates and builds over time, anticipating the need.

In brief, a businessperson claiming to have sufficient funds for an action they propose may be referring to more than the current balance of a cash account or the current balance of Current Assets accounts. Stating that an activity has been "funded" simply means that someone promises or guarantees funds will be available.

The Funds Flow Statement is a Cash Flow Statement

Note that the financial accounting report, Statement of Changes in Financial Position (SCFP) has two alternate names. In financial accounting, the SCFP is also legitimately called either the Cash Flow Statement or the Funds Flow Statement. In this instance, the terms cash and funds are completely interchangeable.

Explaining Funds and Funding in Context

Sections below further explain and illustrate funds and funding in context with related business concepts involved in providing funds for:

  • Capital spending.
  • Project funding.
  • Organizational budget funding.
  • Funding investments and retiring debt.


Related Topics

What is the Meaning of Funding?
What Are the Major Funding Needs in Most Organizations?

The term funding refers simply to money the organization designates (budgets) for specific purposes, such as capital spending or an organization's operating budget.

Sections below show how organizations and individuals achieve funding in this sense, by participating in the formal funding activities that organizations use for making funding decisions.

What is the Meaning of External Funding?

External funding means providing for the financial needs of a company through outside sources such as taking out loans, securing grants, or selling stock, which contrasts with generating funds internally from profit.

Funding Capital Acquisitions and Capital Projects

Organizations usually acquire capital assets with cash expenditures. Cash funds for this purpose may come from (1) cash on hand and other current assets, (2) bank loans or other new debt, or (3) sinking funds established earlier for the purpose.

The Capital Investment Strategy

In all such cases, the decision to fund a request for acquiring a capital item is the final step in a process that begins when the organization creates or updates its capital investment strategy.

  • In large organizations, responsibility for implementing this strategy belongs to the director and staff of a Capital Spending Review Committee, Capital Management Office, or another group with a similar name.
  • This group works closely with budgeting and finance offices during the budgeting cycle, to set a maximum capital spending limit (capital spending ceiling).
  • After setting a ceiling level, the funds now set aside for capital spending are referred to as the organization's capital funds.

Capital Spending Proposals

The Capital Review Committee then invites managers throughout the organization to submit capital funding proposals (requests). The Committee then reviews and prioritizes proposals through a formal review process, a capital review process. Managers anticipating submitting proposals in the forthcoming review cycle improve their chances of receiving funding by studying thoroughly the requirements, scheduling, and history of their local review process.

The Business Case for Funding

Capital review groups normally require a business case analysis with each funding request. Reviewers expect the business case to use credible evidence and compelling reasoning to support three points:

  1. The proposal acquisition supports the organization's strategic objectives. This is another way of saying that the acquisition aligns with the organization's strategy.
  2. investment in the acquisition will bring a desirable return on investment (e.g. by exceeding an established hurdle rate). This is another way of saying that the business case justifies the acquisition financially
  3. Risks associated with the proposal capital investment are manageable and acceptable.

When the business case fails on any of these points, review committees normally take one of the following actions:

  • Reject the proposal entirely.
  • Assign it a very low priority against competing proposals
  • Send the proposal and its business case back to the submitting manager for re-work and possible re-submission in a subsequent budget cycle.

Awarding Capital Funding in a Competitive Process

For proposals whose business case succeeds on points 1-3, however, funding is not assured until the Review Committee compares the sum of funding requests to the capital spending ceiling. If the sum of requests exceeds the spending ceiling, individual proposals must compete with each other for available capital funds.

For this competition, review committees assign a priority scoreto each competing proposal. Committees base priority scores on the proposal's performance on the three business case points above: strategic alignment, financial justification, and risk assessment. Committees than grant funding to individual proposals, starting with the proposal ranking highest in priority, then second highest in priority, and so on, until total spending exceeds the ceiling.

See the article Business Case Analysis for in-depth explanation of the business case role in supporting capital funding proposals and project proposals.

Funding Projects

Projects that will consume time, human labor, and other resources, almost always require specific funding approval.

A single project , incidentally, may require funding from both the Capital expenditure budget (CAPEX) as well as funding from the Operating expense budget (OPEX).

  • When the project results in the creation of capital assets, the entire project proposal may be considered a capital project. In such cases, a capital review committee will review the proposal through the normal capital review process (above). The review committee in such cases should include one or more PMO officers.
  • Alternatively, project planning and funding decisions may be managed entirely by a Project Management Office (PMO) within the organization. For this, the PMO plays a role very similar to that of the capital review committee described above. In such cases, individual project managers submit their proposals directly to the PMO.

Local PMO officers will describe for prospective project managers exactly what they expect in project proposals. Locally relevant proposal requirements are necessary because quite a few of the firm's different functional areas may engage in structured project work. As a result, requirement details may vary from place to place within the firm. Speaking generally, however, project managers will understand that the PMO expects new project proposals to include:

  1. Project deliverables and project objectives.
  2. A high-level summary of project tasks. For this, the Project manager should anticipate task time requirements, task contingencies, and an overall project time-line showing the project critical path.
  3. Estimated funding needs, from both operating budgets and capital spending budgets.
  4. A quantitative risk assessment that identifies and measures risks to project success. This assessment should include a plan for managing risk.
  5. A business case analysis projecting likely project outcomes.

The business analysis must show crediblythat the project in view:

  • Supports overall organization strategy and objectives.
  • Meets individual stakeholder needs
  • Justifies itself in financial terms.
  • Contributes positively to the PMO's project portfolio performance. This means that the project synchronizes with other projects, does not conflict with other projects, and does not raise project portfolio risks.

Funding Organizational Budgets

Organizations at all levels in government and private industry pay their expenses from funds designated for them in the firm's operating budget. The norm in private industry is to produce an operating budget for each fiscal year. Some government groups also prepare annual plans, but two-year (biennial) budgets are also common in government.

Over a certain time period before the end of the current budget period organizations plan and approve a new budget for the forthcoming period. The planning and approval activities constitute the organization's budgeting process. The entire process of planning, approving, and then using a budget through its designated period is one instance of the organization's budgeting cycle.

The budgeting process itself normally consists of three steps: (1) Preparing a budgetary funding plan, (2) reviewing and adjusting the budget plan, and (3) submitting the plan for final approval.

Step 1: Preparing the Budget Plan

Although specific steps and timing vary from entity to entity, the budgeting process everywhere begins by preparing a budget plan. This, in turn, begins with steps for:

  • Assessing variances in the previous period's budget, between actual spending and revenues, on the one hand, and actual spending and revenues on the other.
  • Identifying and prioritizing business needs and objectives for the forthcoming period, and the costs of meeting these needs.
  • Forecasting and evaluating the following:
    • Incoming revenues.
    • Current trends or changes that have spending or revenue implications. Special attention may focus on new mandates to reduce spending, or changes in staffing levels, or changes in business volume.
    • Risks or emergencies that could impact incoming funds or spending needs. The budget, in other words, may need to anticipate events such as labor action, competitor action, or natural disasters.

Step 2. Reviewing and Adjusting the Budget Plan

With the preliminary budget plan in hand, organization leadership submits the plan for review and final adjustment.

  • In private industry, a Budget Director and budget office staff normally direct the review of operating budget funding requests.
  • In government, legislative review committees normally review, evaluate, and adjust budget plans.

In either case, Budget Office or Legislative reviewers are responsible for ensuring that:

  • individual funding proposals in the complete plan are consistent in format. As a result, other reviewers and those deciding funding approval an compare competing plans, fairly.
  • Budget funding proposals align with the organization's mission and strategic objectives.
  • Procedures and methods are in place for implementing monitoring the plan.

Step 3. Granting Funding Approval.

After its review and adjustment, the budget plan is now a funding proposal or funding request. The Budget office submits the full set of budget requests for approval, to the final approval authority.

  • In government, final funding approval normally results from a vote of the entire legislative body.
  • In private industry, the firm's Board of Directors is normally responsible for final budget approval.

With final approval, the organizations budget for the budget period is in place. For more on the budgeting process, and the different roles involved in budgeting, see the article

Steps in the Budget Process

Although specific steps and timing vary from entity to entity, the budgeting process everywhere almost always includes steps for:

  • Assessing variances between actual and budgeted figures in the previous period's plan.
  • Identifying and then prioritizing business needs and objectives for the forthcoming period.
  • Forecasting and evaluating the following:
    • Incoming revenues.
    • Current trends or changes that have spending or revenue implications. Special attention may focus on new mandates to reduce spending, or changes in staffing levels, or changes in business volume.
    • Risks or emergencies that could impact incoming funds or spending needs. The budget, in other words, may need to anticipate events such as labor action, competitor action, or natural disasters.
  • Ensuring that :
    • individual funding proposals in the complete plan are consistent in format. As a result competing proposals can be compared fairly.
    • Funding proposals align with strategic objectives.
    • Procedures and methods are in place for implementing monitoring the plan.
  • Packaging and communicating funding requests to those responsible for reviewing and approving budget proposals.

In large entities, responsibility for driving and managing the budgeting process belongs to a Budget Office. This office works directly with managers, department heads, and others, to help shape their funding proposals. And, It works at the same time with senior managers, legislative bodies, and senior officials who approve spending. The result is that all budget proposals are developed according to local policies and rules, and that the entire proposal package is reasonable and aligned with entity objectives.

Sinking Funds Anticipate Future Funding Needs

It is common practice in business to anticipate meeting future funding needs by creating a sinking fund. The term refers to financial resources and their earnings designated for a specific future need, where the organization knows the future date, the magnitude, and the funding use. Business firms and governments alike use sinking funds to build cash pools for future use paying off loans, retiring bonds, making acquisitions, or investing.

Sinking funds work in this way as special purpose savings accounts for the express purpose of ensuring that an organization has funds on hand to meet specific long-term spending needs.

The sinking fund concept appears in personal finance, as well, when individuals periodically set aside funds for a specific future use, such as purchasing holiday gifts, taking a vacation trip, or building an addition to a house.

See the article Sinking Funds for in-depth explanation of sinking fund concepts, calculations, and usage.