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.
Operating activities consist of principal activities that a company performs to earn income. In other words, these are the primary business operations that a company performs to earn revenue. This is what the company is in business to do.
Explanation :
These cash inflows and outflows from operating activities are reported on two different financial statements. First, they show up on the income statement and are used to compute net income. Second, they are reported on the statement of cash flows. This statement shows how cash from three main sources (operating activities, investing activities, and financing activities) increased or decreased during the period. Operating activities are distinguished from investing or financing activities, which are functions of a company not directly related to the provision of goods and services. Instead, financing and investing activities help the company function optimally over the longer term. This means that the issuance of stock or bonds by a company are not counted as operating activities.
In a nutshell :
- Operating activities are the daily activities of a company involved in producing and selling its product, generating revenues, as well as general administrative and maintenance activities.
- Key operating activities for a company include manufacturing, sales, advertising, and marketing activities.
- Cash flows from operations are an important metric used by financial analysts and investors.
- Operating activities can be contrasted with the investing and financing activities of a firm.
Pro rata means the proportional allocation of a given numerical figure. In other words, it is the distribution of a given amount by using pre-established percentages.
Explanation:
This term comes from the latin pró ratá, which means according to the calculated share. This is a concept that sounds more complicated than it is and its application can be easily identified. In business, a pro-rata calculations are used for the purpose of allocating revenues, expenses, capital and many other financial figures to different recipients for the purpose of analysis, sorting, or distribution.In the case of revenues, a pro rata calculation can be used to set a quota for different geographical locations, e.g. the quota for the Hollywood district will be 12.5% of last year’s sales of the Los Angeles state office. On the other hand, expenses can be set by using a pro-rata approach when a budget is being designed, e.g. marketing expenses will be limited to 5% of net revenues. Nevertheless, the most common use of pro-rata in business is the allocation of capital according to shareholders ownership, e.g. if a shareholder owns 20% of the shares of a given company that means he’s entitled to 20% of the total capital of that company.
In a nutshell:
- If something is given out pro rata, it typically means everyone gets their fair share.
- Pro rata means proportionally, such as fees that rise pro rata with employee salaries.
- The practice of prorating can apply in many areas, from billing for services to paying out dividends or allocating business partnership income.
Payback period, also called PBP, is the amount of time it takes for an investment’s cash flows to equal its initial cost. In other words, it’s the amount of time it takes for an investment to pay for itself. This is an important time-based measurement because it shows management how lucrative and risky an investment can be.
Explanation:
When management is considering whether or not to purchase new assets, they typically favor investments with shorter payback periods. These investments are less risky because the company gets its money back quicker and can reinvest it into a new piece of equipment. Investments with longer payback periods are most risky than ones with shorter periods because there is no way to know how the future will pan out. A manager is more likely to purchase a machine that should pay for itself in 6 months, than something that will tie up company funds for 3 years. A shorter payback period reduces the company risk of inaccurate future projections of investment cash flow.
In a nutshell:
- The payback period is the length of time it takes to recover the cost of an investment or the length of time an investor needs to reach a breakeven point.
- Shorter paybacks mean more attractive investments, while longer payback periods are less desirable.
- The payback period is calculated by dividing the amount of the investment by the annual cash flow.
- Account and fund managers use the payback period to determine whether to go through with an investment.
- One of the downsides of the payback period is that it disregards the time value of money.
A patent is the exclusive, legal right to use a process or create and sell a product for 20 years. The US government has developed patent laws to give inventors and innovators motivation to keep pursuing new ideas and technology. The idea behind a patent is that if a person develops a new technology, manufacturing process, or device; he can patent it and prevent others from copying him for 20 years. This means the inventor can protect his creation and capitalize on it during the patent period.
Explanation:
Many people get patents, trademarks, and copyrights confused. Patents are only issued for a product design, functionality, or production process. Trademarks are issued for branding rights and copyrights are issued for other intangible property rights like music.A patent is an intangible asset to a company. Patents are similar to goodwill or natural resources rights. They are not expensed when bought; instead they are amortized of the useful life, which is 20 years.
In a nutshell:
- A patent is the granting of a property right by a sovereign authority to an inventor.
- A patent provides the inventor exclusive rights to the patented process, design, or invention for a certain period in exchange for a complete disclosure of the invention.
- In June of 2018, the U.S. Patent and Trademark Office issued its 10 millionth patent.
- Utility patents are the most common patent issued in the United States, accounting for 90% of all issued patents.
- Utility and plant patents are granted for 20 years, whereas design patents are granted for either 14 or 15 years, depending on when filed.
A partnership is an unincorporated business entity formed by two or more people. The owners of a partnership are called partners because they join efforts and resources to start the business.
Explanation:
Partnerships are like sole proprietorships in that no legal entity must be established. A partnership is established as soon as two or more people agree to go into business together. This is considered a general partnership because all the partners running the operations of the business share the risk and liability. A general partnership only has general partners also called unlimited partners.These general partners split the income and loss of the partnership based on their partnership percentage. For instance, a partner who owns 33% of a partnership would receive 33% of the income or 33% of the loss for the year. Each partner reports this income or loss on his personal income tax return. This is why a partnership is considered a flow-through entity. The income or loss flows through the business to the individual.
In a nutshell:
- A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
- In a general partnership company, all members share both profits and liabilities.
- Professionals like doctors and lawyers often form a limited liability partnership.
- There may be tax benefits to a partnership compared to a corporation.
A partial payment is a payment that fulfills only a portion of the total amount owed. It is a disbursement that corresponds to just a fraction of a given financial commitment.
Explanation:
These kinds of payments happen in many different scenarios like real estate deals, where the buyer frequently issues an upfront payment to cover a portion of the whole value of the property and the rest is either paid in separate installments or it is fulfilled through a mortgage debt. On the other hand, in regular business environments, partial payments are also issued to place service orders, while the rest of the payment is delivered after the service is properly completed. This allows the buyer to remain in control of a certain fraction of the money to motivate the service supplier to complete the service as expected in order to receive the last portion. Business takeovers and mergers are also scenarios where partial payments are issued according to a previously agreed schedule. The buying side of the transaction uses this as a security measure in case unforeseen circumstances, not fully disclosed in the agreement, affect the nature of the transaction. Having a remaining sum of money yet to be paid allows the buyer to withhold money as a compensation in case these circumstances are negatively affecting the company being purchased.
In a nutshell:
- Partial payment refers to the payment of an invoice that is less than the full amount due.
- Create professional credit notes for free with SumUp Invoices.
- Partial payment is normally half of the total amount or a percentage of it.
Par value is the dollar amount assigned to each share of stock in the corporate charter when the corporation is formed. In other words, when incorporation papers are made, a par value is assigned saying the company stock is worth at least this much per share. Some companies set their par value at $1 while others set their stocks’ par value at $10. There is no limit as to how high or low the stock par value has to be. The par value is usually set at a low price to encourage investors.
Explanation:
Many states have laws that recognize the par value as a minimum legal capital. This is the lowest amount someone can pay for the stock. If someone pays a price under the minimum legal capital, they will owe the company the difference at a future date.
In a nutshell:
- Par value, also known as nominal value, is the face value of a bond or the stock value stated in the corporate charter.
- Par value for a bond is usually $1,000 (or to a lesser degree $100), as these are the most common denominations in which they are issued.
- Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments.
Quick assets are assets that can be used up or realized (turned into cash) in less than one year or operating cycle. These assets usually include cash, cash equivalents, accounts receivable, inventory, supplies, and temporary investments.
Explanation:
The term quick assets is often used interchangeably with the term current assets. Current assets are referred to as quick assets because of how fast they are converted into cash. GAAP requires that current assets or quick assets be separated from long-term assets on the face of the balance sheet. This gives investors and creditors insight as to how liquid the company is. In other words, investors and creditors can see how easily current liabilities can be paid.
In a nutshell:
- Current and quick assets are two categories from the balance sheet that analysts use to examine a company’s liquidity.
- Quick assets are equal to the summation of a company’s cash and equivalents, marketable securities, and accounts receivable which are all assets that represent or can be easily converted to cash.
- Quick assets are considered to be a more conservative measure of a company’s liquidity than current assets since it excludes inventories.
Quality costs are the all the costs that a manufacturer incurs to ensure it produces a quality product. Quality costs include both costs to prevent low-quality production and costs that arise after a low quality product is produced.
Explanation:
All manufacturers spend time and resources trying to produce the highest quality products at the lowest prices. Some manufacturers, like Apple, take pride in their reputation and spend great amounts of money to make sure their products are of the highest quality.
In a nutshell:
- Quality costs are the costs associated with preventing, detecting, and remediating product issues related to quality.
- Quality costs do not involve simply upgrading the perceived value of a product to a higher standard.
