READING A FINANCIAL STATEMENT can be a mind-numbing exercise, but it is crucial if you really want to understand the financial condition of a prospective vendor. Here are a few tips from Peter Knutson, an accounting professor at the University of Pennsylvania Wharton School: First, look at the company’s liquidity?its ability to pay the bills?rather than at its assets. To do that, compare the amount of cash a vendor has on hand and its accounts receivables with the amount of money it owes. If the debt exceeds the cash, the company doesn’t have enough money in receivables to pay the bills, and that’s a bad sign. Carefully scrutinize the vendor’s cash flow statement. There are three sections of the cash flow statement. The first details the net cash generated by selling products or services that are also needed to run the business. The second reveals how much the company is spending on acquisitions or investing in future assets. The third states how the company is financing itself with outside capital. “Be wary of a company whose major source of cash is in the financing section,” Knutson says. “That means they are getting cash from borrowing money and issuing shares, as opposed to [getting cash from] operations.” Walk away from a company whose major source of cash flow is in securities. That means the company is issuing securities and borrowing money to run other companies without generating any cash. “That’s the worst of all situations,” he warns. “The company is spending all of its money buying other companies and operating them at a cash deficit rather than operating its own business. That’s the kind of company you want to avoid.” Check to see whether the cash generated from running the business matches over time with the income the company reports on the income statement. If a company reports revenue on the income statement but doesn’t collect that revenue from the customers, it ends up as receivables on the balance sheet and doesn’t become cash. “If they’re reporting a lot of income on the income statement but it doesn’t eventually show up on the cash flow statement as cash from operating activities, then you can ask if you’re really looking at income,” Knutson says. You’re probably not. Finally, check if the company has lengthened its collection periods. If so, that means customers are not paying up. “You wonder if the company will ever collect those receivables,” he concludes. Related content Opinion How can CIOs protect Personal Identifiable Information (PII) for a new class of data consumers? Enterprises and data owners must ensure customer data privacy while training their machine learning models. Let us learn how. By Yash Mehta Mar 22, 2023 10 mins Data Privacy Data Science Machine Learning News ServiceNow continues workflow platform expansion with Utah release The company also doubles down on its customer success automation efforts, but bucks the trend by omitting GPT. By Peter Sayer Mar 22, 2023 7 mins CIO Build Automation Enterprise Architecture BrandPost Don’t buy into the hype of network observability to realize digital transformation success Just collect the right data and follow it to where it leads you. By Jeremy Rossbach, Chief Technical Evangelist, Broadcom Mar 22, 2023 3 mins Networking Feature How culture and strategic partnerships help fuel transformation Marc Hale, CTO for AIA New Zealand, recently spoke with Cathy O’Sullivan, editor for CIO New Zealand, about navigating the complexities of digital transformation, and focusing on culture to enable healthier outcomes for customers. By CIO staff Mar 22, 2023 7 mins CTO Digital Transformation Change Management Podcasts Videos Resources Events SUBSCRIBE TO OUR NEWSLETTER From our editors straight to your inbox Get started by entering your email address below. Please enter a valid email address Subscribe