In financial accounting, operating cash flow (OCF), cash flow provided by operations, cash flow from operating activities (CFO) or free cash flow from operations (FCFO), refers to the amount of

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-im ...

company A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

generates from the

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...

s it brings in, excluding

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...

s associated with long-term investment on

capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the durable produced goods used fo ...

items or investment in securities. Operating activities include any spending or sources of cash that’s involved in a company’s day-to-day business activities. The International Financial Reporting Standards defines operating cash flow as cash generated from operations, less taxation and

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

paid, gives rise to operating cash flows. 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. Cash generated from ''operating'' customers * revenue as reported * − increase (decrease) in ''operating'' trade receivables (1) * − investment income (Profit on asset Sales, disclosed separately in Investment Cash Flow) * − other income that is non cash and/or non sales related Cash paid to ''operating'' suppliers * costs of sales − Stock Variation = Purchase of goods. (2) * + all other expenses * − increase (decrease) in ''operating'' trade payables (1) * − non cash expense items such as

depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...

, provisioning, impairments,

bad debt Bad debt, occasionally called uncollectible accounts expense, is a monetary amount owed to a creditor that is unlikely to be paid and for which the creditor is not willing to take action to collect for various reasons, often due to the debtor not ...

s, etc. * − financing expenses (disclosed separately in Finance Cash Flow) Notes # ''operating'': Variations of Assets Suppliers and Clients accounts will be disclosed in the Financial Cash Flow # Cost of Sales = Stock Out for sales. It is Cash Neutral. Cost of Sales − Stock Variation = Stock out − (Stock out − Stock In) = Stock In = Purchase of goods: Cash Out

Operating Cash Flow vs. Net Income, EBIT, and EBITDA

Interest is a financing 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 EBIT, Ebit or ebit may refer to: *EBIT, or Earnings before interest and taxes, in finance *EBIT, or Electron beam ion trap, in physics *An ebit (quantum state), a two-party quantum state with quantum entanglement Quantum entanglement is the ph ...

. For example, a company with numerous fixed assets on its books (e.g. factories, machinery, etc.) would likely have decreased net income due to

; however, as depreciation is a non-cash expense the operating cash flow would provide a more accurate picture of the company's current cash holdings than the artificially low net income. Definition of OCF via Wikinvest

Earnings before interest, taxes, depreciation and amortization A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...

or just EBITDA is a kind of operating income which excludes all non-operating and non-cash expenses. With it, factors like

debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...

financing as well as depreciation, and amortization expenses are stripped out when calculating profitability. Thus, it can be used to analyze and compare profitability among companies and industries, as it eliminates the effects of financing and capital expenditures. It is also a useful metric for understanding a business’s ability to generate cash flow for its owners and for judging a company’s operating performance. 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.

References

{{Reflist Management accounting Cash flow

Operating Cash Flow vs. Net Income, EBIT, and EBITDA

See also

References