What is Operating Cash Flow (OCF)?

Published by Thomas Herold in Accounting, Corporate Finance, Investments

'Operating Cash Flow (OCF)' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Operating Cash Flow is also known by its abbreviated acronym OCF. It refers to a metric for the quantity of cash which a corporation or company’s typical daily business operations produce. As such, it provides a good insight into a firm’s ability to generate enough cash flow in order to either grow or at the very least maintain its existing operations. It might also prove that a going concern requires outside financing in order to fund its expansion plans.

Publically traded firms must calculate their Operating Cash Flows through employing an indirect method of calculation. This GAAP Generally Accepted Accounting Principles mandate means that they have to adjust their net income into a cash basis. They do this by making alterations to their accounts that are not cash. This includes accounts receivable, depreciation categories, and inventory changes.

In fact the Operating Cash Flow is a true representation of the cash portion of the firm’s net income. This will also take into account other non-cash items thanks to the requirements which the GAAP sets out for net incomes to be done as accrual-based reporting. This means that amortization, compensation which is based upon stock shares, and incurred but as of yet not paid for expenses would be included in the calculations.

Besides this the actual net income has to be adjusted to reflect changes to working capital kinds of accounts in the balance sheet of the corporation. Especially important is the fact that any accounts receivable increases actually equate to booked revenues for which no collections have been completed. Because of this, these increases have to be taken off of the net income figure. This is partially offset at least by any reported accounts payable increases that are due but as of yet not paid, since this remains in the net income number.

Analysts have opined that such Operating Cash Flow represents the most accurate and basic form of outflows and inflows of cash as a company engages in its normal operations of the daily business. Where the health of a firm is concerned, this represents among the most crucial of metrics. Yet it most appropriately and usefully works for those corporations that are not overly complex.

The Operating Cash Flows focus on the both outflows and inflows which a corporation’s principal business activities involve. This includes buying and selling inventory, paying employee salaries, and delivering services. It is important to remember that all financing and investing activities will not be included in the Operating Cash Flow. These become reportable separately. A part of these excluded activities would be purchasing equipment and factories, borrowing money, and engaging in share holder dividend payouts. Finding this cash flow number is easy by looking at the corporation’s cash flows statement. This statement will break out the numbers into several categories including cash flows from operations, from financing, and from investing.

Operating Cash Flow is a very important number on a company balance sheet. Many financial analysts and investors would rather consider such cash flow measures since they reduce the impacts of confusing and opaque accounting tricks. It also delivers a better, sharper big picture for the business operations’ health and reality.

Consider the following examples. When a firm concludes a big sale, this delivers a major increase to its revenues. This is irrelevant though if the firm can not collect on the money owed. It does not represent a real gain for the corporation. At the same time, firms could be producing elevated operating cash flow numbers. Despite this, they might have an abysmally low net income number if they employ an accelerated depreciation calculation or possess many fixed assets.

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The term 'Operating Cash Flow (OCF)' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.