Operating Cash Flow, also known as “cash flow from operations,” is the cash generated or used in a company's regular business operations. The cash flow statement is divided into three categories: operating, investing, and financing activities. The Operating Cash Flow reflects the cash inflows and outflows from the primary business activities of a company, like sales of products or services, payment of suppliers, and employee salaries.
Operating Cash Flow is an essential metric for businesses, as it provides insight into a company's ability to generate cash from its core operations. A positive cash flow from operations indicates that a company has enough cash to fund its ongoing operations, invest in new projects, pay dividends, or pay off debt. In contrast, negative Operating Cash Flow can be a warning sign for investors or creditors that a company may have difficulty meeting its financial obligations in the future.
Operating Cash Flow is particularly important for businesses that are rapidly growing or investing heavily in new projects or products. In these cases, a company may have a negative net income, due to high expenses or depreciation, but positive cash flow from operations, indicating that it has enough cash to fund its growth plans.
The formula for Operating Cash Flow is:
Operating Cash Flow = Net Income + Non-Cash Expenses - Changes in Working Capital
Net income: This is the company's total revenue minus total expenses, including taxes and interest.
Non-cash expenses: This includes expenses that do not involve cash transactions, like depreciation and amortization.
Changes in working capital: This refers to changes in the company's current assets and liabilities, like accounts receivable, accounts payable, and inventory.