Operating cash flow
In financial accounting, operating cash flow (OCF), cash flow provided by operations or cash flow from operating activities (CFO), refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. The International Financial Reporting Standards defines operating cash flow as cash generated from operations less taxation and interest paid, investment income received and less dividends 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, provisioning, impairments, bad debts, etc.
- - financing expenses (disclosed separately in Finance Cash Flow)
(1): operating: Variations of Assets Suppliers and Clients accounts will be disclosed in the Financial Cash Flow
(2): 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 an operating 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. For example, a company with numerous fixed assets on its books (e.g. factories, machinery, etc.) would likely have decreased net income due to depreciation; 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.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP metric that can be used to evaluate a company's profitability based on net working capital. 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.