Explanation :OCF is exclusively related to a firm’s operating activities during a specific time period or business cycle (year, quarter or month), and it is used to assess a firm’s profitability by including a firm’s cash flow. A high OCF helps a firm expand into new markets, develop a new product, and lower its debt. It also indicates a solvent firm that can return shareholder value by distributing cash dividends .In contrast, firms with a negative operating cash flow for an extended period tend to struggle to meet their financial obligations and are typically forced to borrow money to stay in business.
In a nutshell :
- Operating cash flow is an important benchmark to determine the financial success of a company's core business activities.
- Operating cash flow is the first section depicted on a cash flow statement, which also includes cash from investing and financing activities.
- There are two methods for depicting operating cash flow on a cash flow statement—the indirect method and the direct method.
- The indirect method begins with net income from the income statement then adds back non-cash items to arrive at a cash basis figure.
- The direct method tracks all transactions in a period on a cash basis and uses actual cash inflows and outflows on the cash flow statement.