Operating Cash Flow (OCF)

What Is Operating Cash Flow (OCF)?

Operating cash flow (OCF) is a measure of the amount of cash created by a company's normal business operations. Operating cash flow demonstrates whether a company can create adequate positive cash flow to keep up with and develop its operations, any other way, it might require outer financing for capital expansion.

Figuring out Operating Cash Flow (OCF)

Operating cash flow addresses the cash impact of a company's net income (NI) from its primary business activities. Operating cash flow — additionally alluded to as cash flow from operating activities — is the principal section introduced on the cash flow statement.

Two methods of introducing the operating cash flow section are acceptable under generally accepted accounting principles (GAAP) — the indirect method or the direct method. Nonetheless, in the event that the direct method is utilized, the company must in any case perform a separate reconciliation to the indirect method.

Operating cash flows focus on cash inflows and outflows connected with a company's principal business activities, like selling and purchasing inventory, offering types of assistance, and paying salaries. Any investing and financing transactions are excluded from the operating cash flows section and reported separately, like borrowing, buying capital equipment, and making dividend payments. Operating cash flow can be found on a company's statement of cash flows, which is broken down into cash flows from operations, investing, and financing.

Step by step instructions to Present Operating Cash Flow

Indirect Method

Utilizing the indirect method, net income is adjusted to a cash basis involving changes in non-cash accounts, for example, depreciation, accounts receivable (AR), and accounts payable (AP). Since most companies report the net income on an accrual basis, it incorporates various non-cash things, like depreciation and amortization.

Net income must likewise be adjusted for changes in working capital accounts on the company's balance sheet. For instance, an increase in AR demonstrates that revenue was earned and reported in net income on an accrual basis in spite of the fact that cash has not been received. This increase in AR must be deducted from net income to find the true cash impact of the transactions.

On the other hand, an increase in AP demonstrates that expenses were incurred and set up for an accrual basis that has not yet been paid. This increase in AP would should be added back to net income to find the true cash impact.

Consider a manufacturing company that reports a net income of $100 million, while its operating cash flow is $150 million. The difference results from depreciation expense of $150 million, an increase in accounts receivable of $50 million, and a lessening in accounts payable of $50 million. Apparently on the operating cash flow section of the cash flow statement as such:

The subsequent choice is the direct method, where a company records all transactions on a cash basis and presentations the data utilizing genuine cash inflows and outflows during the accounting period. Instances of things remembered for the introduction of the direct method of operating cash flow include:

• Salaries paid out to workers
• Cash paid to sellers and providers
• Cash collected from clients
• Interest income and dividends received
• Income tax paid and interest paid

Significance of Operating Cash Flow

Financial analysts some of the time like to see cash flow metrics since they strip away certain accounting irregularities. Operating cash flow, explicitly, gives a clearer image of the current reality of the business operations.

For instance, booking a large sale gives a big lift to revenue, however in the event that the company is struggling with gathering the cash, it's anything but a true economic benefit for the company. Then again, a company might produce high amounts of operating cash flow however report an exceptionally low net income on the off chance that it has a ton of fixed assets and utilizations accelerated depreciation estimations.

In the event that a company isn't getting sufficient money from its core business operations, it should track down temporary wellsprings of outer funding through financing or investing. Be that as it may, this is unreasonable over the long haul. In this manner, operating cash flow is an important figure to evaluate the financial stability of a company's operations.

Highlights

• There are two methods for portraying operating cash flow on a cash flow statement — the indirect method and the direct method.
• The indirect method starts with net income from the income statement then, at that point, adds back non-cash things to arrive at a cash basis figure.
• The direct method tracks all transactions in a period on a cash basis and utilizations genuine cash inflows and outflows on the cash flow statement.
• Operating cash flow is the primary section portrayed on a cash flow statement, which likewise incorporates cash from investing and financing activities.
• Operating cash flow is an important benchmark to decide the financial progress of a company's core business activities.

FAQ

How Do You Calculate Operating Cash Flow?

Utilizing the indirect method, net income is adjusted to a cash basis involving changes in non-cash accounts, for example, depreciation, accounts receivable, and accounts payable (AP). Since most companies report the net income on an accrual basis, it incorporates various non-cash things, like depreciation and amortization. Operating Cash Flow = Operating Income + Depreciation - Taxes + Change in Working Capital.

What Are the 3 Types of Cash Flows?

The three types of cash flow are operating, investing, and financing. Operating cash flow incorporates all cash produced by a company's principal business activities. Investing cash flow remembers all purchases of capital assets and investments for other business adventures. Financing cash flow incorporates all proceeds acquired from giving debt and equity as well as payments made by the company.

Why Is Operating Cash Flow Important?

Operating cash flow is an important benchmark to decide the financial progress of a company's core business activities as it measures the amount of cash produced by a company's normal business operations. Operating cash flow shows whether a company can produce adequate positive cash flow to keep up with and develop its operations, any other way, it might require outside financing for capital expansion.