Operating cash flow is the amount of cash generated by a company's normal business operations, excluding investment-related activities and financing.

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Why is operating cash flow important?

Operating cash flow is a key indicator of a company's ability to generate cash from its core business operations and maintain financial stability.

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An easy way to understand operating cash flow is:

Tthink of it as a company's heartbeat. Just like a heartbeat pumps blood to keep the body alive, operating cash flow represents the money a company generates to keep its day-to-day operations running.

Formula Of Operating Cash Flow

Operating cash flow (OCF) is the cash generated by a company's core business operations. It represents the cash inflows and outflows related to a company's primary revenue-generating activities. The formula for calculating operating cash flow is:

Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital

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Where:

Net Income is the company's total profit after deducting all expenses and taxes.

Non-Cash Expenses are expenses that do not involve a cash outflow, such as depreciation and amortization.

Changes in Working Capital represent the net change in current assets (excluding cash) and current liabilities during the period.

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To calculate the changes in working capital, use the following formula:

Changes in Working Capital = (Current Assets - Cash) - Current Liabilities

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For example, let's consider a company with the following financial information:

Net Income: $100,000

Depreciation: $20,000

Current Assets (excluding cash) at the beginning of the period: $150,000

Current Assets (excluding cash) at the end of the period: $180,000

Current Liabilities at the beginning of the period: $80,000

Current Liabilities at the end of the period: $90,000

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First, calculate the changes in working capital:

Changes in Working Capital = ($180,000 - $150,000) - ($90,000 - $80,000)

Changes in Working Capital = $30,000 - $10,000 = $20,000

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Then, calculate the operating cash flow:

Operating Cash Flow = $100,000 + $20,000 + $20,000

Operating Cash Flow = $140,000

In this example, the company generated $140,000 in cash from its core business operations during the period.

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Operating cash flow is an important metric for assessing a company's financial health and its ability to generate cash from its primary business activities. It is used in various financial analyses, such as cash flow statements and valuation models.

Operating cash flow is critical for our financial stability. It reflects the cash generated from our core business operations, enabling us to fund investment activities, meet financial obligations, and maintain sufficient reserves for unexpected expenses.