Cashflow review explains how profit converts into liquidity.A business may report profits yet face cash shortages—making cashflow analysis a critical year-end diagnostic tool.
1. Introduction — Why Cashflow Review Is Essential
Cashflow answers three fundamental questions:
Is the core business generating cash?
Where is cash being invested?
How is the business funded?
Persistent mismatch between profit and cashflow raises concerns with bankers, auditors, and tax authorities.
2. Objective
To ensure that at year-end:
Cash movements are logically classified
Operating cashflow reflects business performance
Investing and financing activities are correctly captured
Liquidity risks are identified early
3. Understanding the Three Cashflow Categories
Operating Activities
Cash generated or used in core business operations.
Investing Activities
Cash used for acquisition or disposal of long-term assets.
Financing Activities
Cash flows relating to borrowings, repayments, and capital.
Each category has a distinct analytical purpose.
4. CABTA Framework — “The 7-Step Cashflow Review Model”
Step 1 — Operating Cashflow Analysis
Review:
Net cash from operations
Profit vs operating cash conversion
Sustainability of operating cash
Negative operating cashflow despite profits is a major red flag.
Step 2 — Working Capital Movement Review
Analyse:
Trade receivables movement
Inventory build-up
Trade payables behaviour
Weak working capital discipline silently drains cash.
Step 3 — Accruals & Payables Impact
Check:
Accrued expenses
Deferred payments
Year-end liability spikes
Artificial cash improvement via unpaid liabilities is unsustainable.
Step 4 — Investing Cashflow Review
Analyse:
Fixed asset purchases
CWIP movement
Asset disposals
Large investments must align with business strategy.
Step 5 — Financing Cashflow Review
Review:
Loan inflows and repayments
Interest payments
Capital infusion or withdrawal
Frequent borrowing to fund operations signals structural weakness.
Step 6 — Cashflow vs Balance Sheet Consistency
Ensure:
Cashflow movements reconcile with balance sheet changes
No unexplained cash or bank movements
Mismatch indicates classification or accounting errors.
Step 7 — Trend & Sustainability Assessment
Assess:
Multi-year operating cashflow trend
Dependence on external funding
Capacity to self-fund growth
5. Common Cashflow Red Flags
Profits with weak operating cashflow
Rapid increase in debtors
Heavy reliance on short-term borrowings
Asset purchases without funding clarity
Cashflow red flags affect valuation, credit rating, and compliance perception.
6. CABTA Insight
“Profit is accounting performance; cashflow is business reality.”