financial accounting Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of Financial statement audit, financial statements available for pu ...

, 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 book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...

company A company, abbreviated as co., is a Legal personality, legal entity representing an association of legal people, whether Natural person, natural, Juridical person, juridical or a mixture of both, with a specific objective. Company members ...

generates from the

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

s it brings in, excluding

cost 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 which case the amount of money expended to acquire it i ...

s associated with long-term

investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...

on capital items or investment in

securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...

. 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

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

ation and

interest In finance and economics, interest is payment from a debtor 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 distinct f ...

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 refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

, provisioning, impairments, bad debts, 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. It takes into consideration how the operations are financed or taxed. 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 In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...

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

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
/ref> Earnings before interest, taxes, depreciation and amortization or just

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

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 Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...

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 (which may also be deemed a demerit of the EBITDA measure). 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

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