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How to Review Your Year-End Cash Flow Statement Like a Seasoned CFO


When I meet with small business owners, it often becomes clear that they are mystified by their business’ financial statements. Unfortunately, because they don’t know what to look for when evaluating these essential documents, they miss out on both red flags and opportunities.

This is the first of a 3-part series on how to conduct a review of your year-end financial statements. In future articles I’ll discuss the other two parts of a quality set of financial statements: your Balance Sheet and Income Statement (also known as a “P&L” or Profit & Loss Statement).

Cash is King
Because cash is so important, the Statement of Cash Flows is the first thing you should look at when conducting a year-end financial review. After all, when it comes to running and expanding a business, cash (or, more specifically, cash flow) truly is king.

Your Statement of Cash Flows helps answer some vital questions. Does your organization have enough cash to stay in business? Is it generating more cash than it’s using – or vice versa? Would it qualify for a bank loan? And more.

Start with the Details
Your starting point should be to ask some important questions about the details:

• How was cash generated by and used in operations? For example, have your collections of trade receivables sped up or slowed down?
• How was cash generated by and used in investing activities? For example, did the company buy or sell property and/or equipment?
• How was cash generated by and used in financing activities? Did the company obtain cash through borrowing? Did it use cash to pay down lines of credit or other long-term debt?

Then Look at the Big Picture
Next look at everything as a whole. Identify any non-cash expenses on your Statement of Cash Flows, such as amortization and depreciation. Add these back to your net income to help you get an accurate picture of your actual cash flow.

Compare cash at the beginning of the period to cash at the end of the period to see if your company is generating positive cash flow. Although there are some exceptions to the rule (such as start-up companies that have received an infusion of cash), generally speaking if your company is generating positive cash flow then it is profitable. Which, of course, is what you’re hoping to see.

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