Operating cash flow: Difference between revisions

Revision as of 22:06, 30 March 2014

Revision as of 01:44, 8 May 2014

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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> The International Financial Reporting Standards defines operating cash flow as cash generated from operations less taxation[[tax]]ation and [[interest]] paid, [[investment]] income received and less dividends[[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

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Interest is an operating flow. 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>[[wikinvest:depreciation|Definition of depreciation via Wikinvest]]</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>[[wikinvest:Operating Cash Flow|Definition of OCF via Wikinvest]]</ref>

Earnings before interest, taxes, depreciation and amortization ([[EBITDA]]) is a non-[[Generally accepted accounting principles|GAAP]] metric that can be used to evaluate a company's profitability based on net working capital. The difference between 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 ==

* [[EBITDA]]

* [[Cash flow]]

* [[Cash flow statement]]