Sources and Uses
When it comes to finance, Sources and Uses (also referred to as “S&U”) is a common concept in finance that refers to where money is coming from (sources) and what it is used for (the “uses”).
This concept is critical for financial planning, budgeting, and forecasting. In this article, we’ll explain what sources and uses are, what typically falls into each category, and why they are important.
What Are Sources and Uses?
Sources and uses is a way of analyzing the inflows and outflows of money for a particular project, company, or investment. Think about it as a table, as it’s commonly presented in business plan and financial models (on the left side are sources and on the right the uses).
What is included in Sources?
Sources of funds refer to where the money is coming from to finance a particular project or investment. These sources could include:
| Source | Definition |
|---|---|
| Equity | Ownership in a company that represents a portion of the total value of the company |
| Debt | Money borrowed from a lender that must be repaid with interest |
| Grants | Money given by a government or other organization for a specific purpose |
| Donations | Money given by individuals or organizations for a specific purpose |
| Cash Reserves | Money set aside by a company for future investments or emergencies |
| Retained Earnings | Profits from previous years that a company has kept for reinvestment |
It’s worth noting that sources can also come from operations, such as revenue generated from sales.
What is included in Uses?
Uses of funds refer to where the money is going or what it’s being used for. These uses could include:
| Use | Definition |
|---|---|
| Capital Expenditures | Investments in long-term assets like property, plant, and equipment |
| Research and Development | Spending on activities that aim to develop new products or services |
| Marketing and Advertising | Costs associated with promoting a product or service |
| Working Capital | Funds used to finance day-to-day operations like payroll, inventory, and accounts receivable |
| Debt Repayment | Money used to pay back loans and interest |
| Dividends | Distributions of a company’s profits to its shareholders |
| Stock Buybacks | Repurchasing of a company’s own shares in the market |
| Acquisitions | Purchases of other companies or assets |
Example of Sources and Uses
To illustrate how sources and uses work in practice, let’s consider an example of a small business that wants to expand its operations by purchasing a new building.
The business plans to finance the purchase through a combination of debt and equity. Here’s a breakdown of how the sources and uses for the project could look like:
| Sources | Amount |
|---|---|
| Debt | $500,000 |
| Equity | $200,000 |
| Total Sources | $700,000 |
| Uses | Amount |
|---|---|
| Purchase of Building | $650,000 |
| Legal Fees | $20,000 |
| Miscellaneous Expenses | $30,000 |
| Total Uses | $700,000 |
