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Operating Cash Flow

Updated on July 18, 2023

Operating cash flow, also known as cash flow from operations, refers to the amount of cash generated or consumed by a company’s core operating activities during a specific period of time. It represents the cash inflows and outflows directly related to the company’s day-to-day operations, excluding cash flows from financing and investing activities.

How to calculate operating cash flow?

The calculation of operating cash flow begins by obtaining the net income figure from the income statement.

Non-cash expenses, such as depreciation and amortization, are included in the calculation by adding them back to the net income

Changes in working capital accounts are considered, and adjustments are made accordingly to reflect their impact on operating cash flow.

Any non-operating income or expenses that are not directly related to core operations are added or subtracted as applicable.

The operating cash flow is derived by summing up the adjusted net income, non-cash expenses, changes in working capital, and other non-operating items.

How to interpret operating cash flow?

The interpretation of operating cash flow is given below.

Positive Operating Cash Flow – A positive operating cash flow indicates that a company’s core operations are generating more cash than they consume, suggesting financial stability and the ability to fund ongoing activities.

Negative Operating Cash Flow – A negative operating cash flow may raise concerns as it suggests that a company’s core operations are not generating sufficient cash to cover expenses. It could indicate financial challenges and the need for external financing.