Operating Cash Flow

Written by Fmi.Online Friday December 9, 2022
Operating cash flow (OCF), also known as cash flow from operations, is the total amount of cash generated by a firm during a given period from its core business activities. Operating cash flow is different from a firm’s free cash flow (FCF) or net income, which includes the depreciation of assets.  

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.
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