Operating cash flow is the cash flow calculated from the revenues generated from a company’s operational activities over a specific period of time.
Operational activities include the sale of goods, provision of services, manufacturing of goods, payment of rent, wages, marketing, bills, research and development. The difference between the cash coming in and the cash going out from these activities will provide the operational cash flow figure.
This cash flow figure will give an indication of the cash generating abilities of a company that can be produced from its core business activities.
Operational Cash Flow = Revenue from Operational activities – Costs of the Operational Activities
Where the Revenue from Operating Costs = Revenue from core business operations (Sales of goods, services etc)
And the Costs of Operational Activities = Costs of running the business (rent, wages, expenses, research and development, marketing etc)
The calculation does not include cash from financing or from investments.
There are two ways of presenting Operating Cash Flow:
The formula for the indirect method
Operational Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital (from one period to another)
The Indirect method calculates Operational Cash Flow by using the figure from the accrual accounting method, Net Income, (accrual is where revenue or expenses are recorded when a transaction occurs rather than when a payment is received or made) then adding or deducting from that figure cash that has not yet been received. This will give the cash based figure so you now have the actual cash received in the period.
Non cash expenses are expenses recorded in the income statement that do not involve an actual cash transaction, for example depreciation. This is therefore added back because the depreciation has reduced the net income figure but no cash was used in that statement.
Working Capital = Current Assets (Cash, Accounts receivables (unpaid bills), cost of producing the product (Raw materials inventory)) – Current Liabilities (amount due to pay to creditors)
Working Capital is a net asset, if the asset increases it indicates that cash has been spent in order for the increase to occur. If the change in Working Capital is positive from one period to another then more cash has left the company and needs to be reflected in the Operational Cash Flow calculation as a decrease.
The direct method uses actual cash inflows and outflows from the Operation of the business instead of using the figure from the Operating section from the accrual accounting method and altering it to become a cash statement
Operating Cash Flow (Direct) = Cash inflows – Cash Outflows
Cash Inflows are from sales of goods and services
Cash Outflows are from costs of running the business
Operating Cash Flow is the cash flow generated from normal operations of a business so it provides valuable information into the health and profitability of the core of the business.
As it does not include cash from financing or from investments (either outgoing or incoming) you can see whether the product itself that the business is selling is making sufficient money to keep the company afloat.
This is information that is crucial for investors and analysts to see if this cash flow can sustain the business.
Invoice finance allows you to release cash quickly from your unpaid invoices.
As your lender, we can release up to 90% of your invoices within 24 hours. On payment of the invoice from your customers, we will then release the final amount minus any fees and charges. There are different types of invoice financing options available to businesses depending on the situation and the level of control they require in collecting unpaid invoices.
We are an invoice financing company who offer a solution whereby payments are collected on your behalf managed by our team of expert credit controllers so you can focus on running your business. Our Confidential Invoice Discounting solution is offered to businesses who want to maintain their own credit control processes, therefore this remains strictly confidential so your customers are unaware of our involvement.
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