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{{Short description|Metric in financial accounting}}
In [[financial accounting]], '''operating cash flow''' (OCF), '''cash flow provided by operations''', '''cash flow from operating activities''' (CFO) or '''free cash flow from operations''' (FCFO), refers to the amount of [[cash]] a [[company]] generates from the [[revenue]]s it brings in, excluding [[cost]]s associated with long-term [[investment]] on [[Financial capital|capital]] items or investment in [[securities]].<ref>Ross, Stephen, Randolf Westerfield and Bradford Jordan '''Fundamentals of Corporate Finance'''</ref> Operating activities include any spending or sources of cash that’s involved in a company’s day-to-day business activities.<ref name=":0">{{Cite web|date=2021-01-21|title=Financial Dictionary|url=https://kerneltools.com/post/financial-dictionary-accounting-terminology/|access-date=2021-02-24|website=Kernel|language=en-GB}}</ref> The International Financial Reporting Standards defines operating cash flow as cash generated from operations, less [[tax]]ation and [[interest]] paid, gives rise to operating cash flows.<ref>'''International Accounting Standards 7, Cash Flow Statements (January 2007)'''</ref> To calculate cash generated from operations, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations.
*
▲Cash generated from customers
▲*revenue as reported
▲*- increase (decrease) in [[accounts receivable|trade receivables]]
▲*- investment income (disclosed separately)
▲*- other income that is non cash and non sales related
Cash paid to ''operating'' suppliers:
* [[cost of goods sold|costs of sales]] − Stock Variation = Purchase of goods. (2)
* + all other expenses
* − increase (decrease) in [[''operating'' accounts payable|''operating'' trade payables]] (1)
* − non cash expense items such as [[depreciation]], provisioning, impairments, [[bad debt]]s, etc.
* − financing expenses (disclosed separately in Finance Cash Flow)
Notes
# ''Operating'': Variations of Assets Suppliers and Clients accounts will be disclosed in the Financial Cash Flow
# Cost of Sales = Stock Out for sales. It is Cash Neutral. Cost of Sales − Stock Variation = Stock out − (Stock out − Stock In) = Stock In = Purchase of goods: Cash Out
==Operating Cash Flow vs. Net Income, EBIT, and EBITDA==
Interest is a financing flow. <ref>[[Ross, Fundamentals of Corporate Finance, 12th edition, 2019]]</ref> It takes into consideration how the operations are financed or taxed. Since it adjusts for liabilities, receivables, and depreciation, operating cash flow is a more accurate measure of how much cash a company has generated (or used) than traditional measures of profitability such as [[net income]] or [[Earnings before interest and taxes|EBIT]]. For example, a company with numerous fixed assets on its books (e.g. factories, machinery, etc.) would likely have decreased [[net income]] due to [[depreciation]]; however, as depreciation is a non-cash expense<ref>[https://www.wikinvest.com/depreciation Definition of depreciation via Wikinvest]{{dead link|date=May 2024|bot=medic}}{{cbignore|bot=medic}}</ref> the operating cash flow would provide a more accurate picture of the company's current cash holdings than the artificially low net income.<ref>[https://www.wikinvest.com/Operating_Cash_Flow Definition of OCF via Wikinvest]{{dead link|date=May 2024|bot=medic}}{{cbignore|bot=medic}}</ref>
[[Earnings before interest, taxes, depreciation and amortization]] or just [[Earnings before interest, taxes, depreciation and amortization|EBITDA]] is a kind of operating income which excludes all non-operating and non-cash expenses. With it, factors like [[debt]] financing as well as depreciation, and amortization expenses are stripped out when calculating profitability.<ref name=":0" /> Thus, it can be used to analyze and compare profitability among companies and industries, as it eliminates the effects of financing and capital expenditures (which may also be deemed a demerit of the EBITDA measure). It is also a useful metric for understanding a business’s ability to generate cash flow for its owners and for judging a company’s operating performance. The difference between [[Earnings before interest, taxes, depreciation and amortization|EBITDA]] and OCF would then reflect how the entity finances its net working capital in the short term. OCF is not a measure of free cash flow and the effect of investment activities would need to be considered to arrive at the free cash flow of the entity.
==See also==
* [[Cash flow]]
* [[Cash flow statement]]
* [[Free cash flow]]
==References==
{{Reflist}}
[[Category:Management accounting]]
[[Category:Cash flow]]
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