Operating cash flow
In financial accounting, operating cash flow (OCF), cash flow provided by operations or cash flow from operating activities, refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities.[1] The International Financial Reporting Standards defines operating cash flow as cash generated from operations less taxation and interest paid, investment income received and less dividends paid gives rise to operating cash flows.[2] 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.
Calculations
Cash generated from customers
- revenue as reported
- - increase (decrease) in trade receivables
- - investment income (disclosed separately)
- - other income that is non cash and non sales related
Cash paid to suppliers
- costs of sales
- + other expenses as reported less
- - increase (decrease) in trade payables
- - non cash items such as depreciation, provisioning, impairments, bad debts, etc.
- - financing expenses
Operating Cash Flow vs. Net Income, EBIT, and EBITDA
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 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[3] the operating cash flow would provide a more accurate picture of the company's current cash holdings than the artificially low net income.[4]
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-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
References
- ^ Ross, Stephen, Randolf Westerfield and Bradford Jordan Fundamentals of Corporate Finance
- ^ International Accounting Standards 7, Cash Flow Statements (January 2007)
- ^ Definition of depreciation via Wikinvest
- ^ Definition of OCF via Wikinvest