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Operating cash flow (OCF), also referred to as net cash from operating activities, is the net cash flow resulting from day-to-day activities used to generate revenue. It is an important metric for investors, lenders, and other stakeholders in understanding a company’s financial health because it reveals the financial performance of the core operations of the business.
Understanding the underlying cash flow of a business provides an indication on whether a company is generating enough money to cover the cost of day-to-day operations. Companies can affect the cash flows they generate by increasing sales and improving operational efficiency.
Operating cash flow is a component of the cash flow statement that is typically grouped with cash flows from investments (purchases and sales of investments and property) and financing activities (equity and debt financings). OCF is distinct from free cash flow, which is OCF minus capital expenditures and dividend payments.
There are two popular methods for calculating operating cash flow on the cash flow statement—the indirect method and the direct method.
The indirect method begins with the net income from the income statement and adjusts for non-cash items such as depreciation and deferred taxes. To arrive at an operating cash flow figure for the period, non-cash items need to be added back to net income.
The direct method shows actual cash flows received or paid during the period as a result of operating activities. It tracks all transactions during the period on a cash basis using cash inflows and outflows on the cash flow statement. This method requires a more detailed tracking of all cash transactions during the period.
In summary, OCF is an important metric that enables investors, lenders, and other stakeholders to measure the underlying cash flow of the business. It is important to bear in mind that operating cash flow should be monitored over a period of time, not just one period, when assessing the financial health of a company.
Understanding the underlying cash flow of a business provides an indication on whether a company is generating enough money to cover the cost of day-to-day operations. Companies can affect the cash flows they generate by increasing sales and improving operational efficiency.
Operating cash flow is a component of the cash flow statement that is typically grouped with cash flows from investments (purchases and sales of investments and property) and financing activities (equity and debt financings). OCF is distinct from free cash flow, which is OCF minus capital expenditures and dividend payments.
There are two popular methods for calculating operating cash flow on the cash flow statement—the indirect method and the direct method.
The indirect method begins with the net income from the income statement and adjusts for non-cash items such as depreciation and deferred taxes. To arrive at an operating cash flow figure for the period, non-cash items need to be added back to net income.
The direct method shows actual cash flows received or paid during the period as a result of operating activities. It tracks all transactions during the period on a cash basis using cash inflows and outflows on the cash flow statement. This method requires a more detailed tracking of all cash transactions during the period.
In summary, OCF is an important metric that enables investors, lenders, and other stakeholders to measure the underlying cash flow of the business. It is important to bear in mind that operating cash flow should be monitored over a period of time, not just one period, when assessing the financial health of a company.