What is Operating Cash Flow?

January 11, 2016 By Dave Chase

You may have heard of cash flow, but what exactly is operating cash flow? While cash flow is the net amount of cash moving in and out of a business, operating cash flow is something different. Operating Cash Flow (OCF) is a measure of the amount of cash generated by a company’s normal business operations. Since it adjusts for liabilities, receivables, and depreciation it is a more accurate measure of how much cash a company has generated than other measures of profitability such as net income.

Why is operating cash flow important?

No matter how you choose to measure cash flow, it is still important. Cash flow (and OCF) is what helps companies expand, launch new products, pay dividends, and even reduce debt.

Without positive cash flow, a company doesn’t have as much flexibility. They may have to borrow money, or in the worst case – go out of business. Having a negative cash flow is acceptable at times, but should not become a habit. If the negative cash flow can be attributed to temporary expansion costs, then that is fine. If the negative cash flow is because of a poor investment or other mistake than won’t correct itself, then your business may be in trouble.

How do you calculate operating cash flow?

Generally, a statement of cash flows breaks out into three different categories per period: cash flows from operations, cash flows from investing activities, and cash flows from financing activities. OCF is calculated using the following formula:

Operating Cash Flows = Net Income + Noncash Expenses (Usually Depreciation Expense) +/- Changes in Working Capital

Wheels

How does operating cash flow relate to the big picture?

In the end, OCF reveals how much cash is generated from the core operations of your business. This is very important to the overall health of your business and the larger picture of cash flow. OCF is just one part of cash flow, and it is typically a big part of what makes your company profitable.

There is a lot more to cash flow and operating cash flow, but the essentials remain. To be a profitable business, you must have a positive cash flow. If you are not positive, then don’t delay in looking for ways to solve this problem. This begins by looking at your OCF, analyzing a cash flow statement, and making plans for the future. Wherever your company is financially, it is important to look towards the future, free up cash to invest in growth, and be ready for any hard times that may come your way.

David Chase, Managing Partner at Advanced CFO Solutions, has experience in small to medium private companies and large public companies as a senior operational and financial leader.  With 15 years in finance, a CFO of multiple entities and divisional EVP experience, Dave has a breadth of experience.  Dave has led or been instrumental in raising multiple rounds of equity and debt in excess of $450 million.

Are you ready to make finance

a competitive advantage?