What Is Operating Cash Flow?

Operating cash flow is the cash that a business generates from its operational activities. It shows if the operations of your company are enough to help sustain and grow your business, otherwise you need to have other investment or financing measures. Read on to find out how you can find out if your company has enough to sustain itself.

The Difference Between Net Income and Operating Cash Flow

If you are a new business owner, you might think that an operating cash flow means the same as the net income or net profit. These terms are different because net income is calculated by subtracting expenses from revenue.

Net income measures whether a company made money during a period of time but does not say the occurrence of the inflows and outflows.

How to Calculate Operating Cash Flow

The following formula is used to calculate operating cash flow:

  • Net Income + Non-Cash Expenses (Depreciation & Amortization) +/- Changes in Working Capital

Net income: the amount of money remaining after expenses have been deducted from a company’s total revenue.

Non-Cash Expenses: these are entries on an income statement relating to expenses that are accounting entries. Two of the most common examples are depreciation and amortization.

Changes in Working Capital: working capital is the difference between current assets and current liabilities of a company. An increase in assets needs to be subtracted while a decrease in assets needs to be added.

What Does Operating Cash Flow Mean?

You want your operating cash flow number to be positive as much as possible. You must examine your cash flow statement routinely so you can see what changes you need to make in your business. Some ideas include:

  • Purchasing less inventory
  • Negotiating with vendors to pay later
  • Shortening accounts receivable terms
  • Increasing prices
  • Obtaining cash flow loans to cover shortfalls that are temporary

The Bottom Line

Operating cash flow is an important financial measure for business owners. It can be daunting to calculate if you are not a bookkeeper. There are software’s that you can use that can help you track expenses, show your current cash flow, and produce cash flow forecasting. If you still need additional help, try reaching out to an experienced financial advisor to help you calculate your operating cash flow.