Operating Cash Flow

What is the Operating Cash Flow?

Operating Cash Flow (OCF) is a measure of the total operating income netted by a company in a specific time, usually daily.

Often the first line on a cash flow statement, OCF refers to daily business expenditures, including but not limited to advertising costs, payroll, and services. OCF does not include investments and interest, nor capital expenditures (the funds used to acquire assets such as real estate and equipment).

In general, it’s ideal to aim for a high OCF. A high OCF indicates your company is increasing its capital without requiring external investments or funding – in short, that your company is profitable.

Operating Cash Flow is a relevant KPI for your finance team to monitor.

Why is Operating Cash Flow important?

Operating Cash Flow is important because it’s a great indicator of business health. It shows if your company is self-sufficient–that is, it can sustain itself, and turn a profit, on the basis of regular business operations.

For this reason, a good OCF will inspire confidence in lenders and investors alike. For large companies, a good OCF will also attract the attention of financial analysts.

How to calculate Operating Cash Flow

To calculate OCF, add your net income and non-cash expenses for the relevant period. Subtract the increase in working capital from this result to obtain your OCF. Be sure to adjust for depreciation, cash and non-cash expenses, and increase in accounts receivable in your net income.

How to increase Operating Cash Flow

There are several strategies to increase your OCF. Most of these involve restructuring your debt, and optimizing your accounts receivable and payable.

If possible, refinance your existing short-term debts to long-term ones. This will increase the amount of capital you have immediately on hand.

Accounts payable are the debts you owe your vendors and suppliers for services rendered. Meanwhile, accounts receivable are the debts your customers owe you for services rendered. Maximize your cash flow by delaying the resolution of accounts payable as long as possible, but by collecting your accounts receivable as soon as possible.

While Operating Cash Flow is generally a positive metric, a negative cash flow is not necessarily a bad thing. It can mean that a company is embarked on a significant long-term project that will yield significant future dividends, and is temporarily subsisting on investor funds until this goal is realized.

Other KPIs similar to Operating Cash Flow include:

• Gross Profit Margin
• Working Capital
• Accounts Receivable and Accounts Payable