Operating cash flow: Difference between revisions

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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, [[investment]] income received and less [[dividend]]s 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 ''operating'' customers:

* revenue as reported

* -&minus; increase (decrease) in [[''operating'' accounts receivable|''operating'' trade receivables]] (1)

* -&minus; investment income (Profit on asset Sales, disclosed separately in Investment Cash Flow)

* -&minus; other income that is non cash and/or non sales related

Cash paid to ''operating'' suppliers:

* [[cost of goods sold|costs of sales]]- &minus; Stock Variation = Purchase of goods. (2)

* + all other expenses

* -&minus; increase (decrease) in [[''operating'' accounts payable|''operating'' trade payables]] (1)

* -&minus; non cash expense items such as [[depreciation]], provisioning, impairments, [[bad debt]]s, etc.

* -&minus; financing expenses (disclosed separately in Finance Cash Flow)

Notes

(1):# ''operatingOperating'': Variations of Assets Suppliers and Clients accounts will be disclosed in the Financial Cash Flow

(2):# Cost of Sales = Stock Out for sales. It is Cash Neutral. Cost of Sales -&minus; Stock Variation = Stock out -&minus; (Stock out -&minus; 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>[[wikinvesthttps://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>[[wikinvesthttps:Operating Cash//www.wikinvest.com/Operating_Cash_Flow 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-[[Generallyoperating acceptedand accountingnon-cash principles|GAAPexpenses. With it, factors like [[debt]] metricfinancing as well as depreciation, and amortization expenses are stripped out when calculating profitability.<ref name=":0" /> Thus, thatit can be used to evaluateanalyze aand company'scompare profitability basedamong oncompanies netand workingindustries, 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==