Operating Cash Flow

Components of Operating Cash Flow

Let’s break down what makes up Operating Cash Flow:

• Revenue: Money coming in from sales
• Operating Expenses: Regular costs of running the business
• Working Capital Changes: Changes in inventory, payables, and receivables
• Non-cash Items: Like depreciation, which affects profit but not cash

👆 Fun Fact: Operating Cash Flow often tells a different story than profit. A company can be profitable on paper but still run out of cash. As investors say, “Revenue is vanity, profit is sanity, but cash is reality!”

Types of Cash Flow

Operating Cash Flow is one of three types of cash flow:

• Operating Cash Flow: Cash from regular business activities, such as day-to-day operations and core business functions.
• Investing Cash Flow: Cash related to buying or selling assets, equipment purchases, or investments.
• Financing Cash Flow: Cash from taking or repaying loans, issuing or buying back stocks, paying dividends, or owner investments.

What’s Included in Operating Cash Flow?

Cash from Sales

• Customer payments
• Recurring revenue
• Service fees
• Other operating income

Cash Payments

• Supplier payments
• Employee salaries
• Rent and utilities
• Other operating expenses

Working Capital Changes

• Changes in inventory levels
• Changes in accounts receivable
• Changes in accounts payable
• Changes in other current assets and liabilities

Why is Operating Cash Flow Important?

Operating Cash Flow helps businesses understand:

• If core business operations generate cash
• How well the company manages its working capital
• Whether there’s enough cash for growth and investments
• If the business needs external funding
• How sustainable the business model is

Remember: Operating Cash Flow is different from profit. A business can be profitable but have negative cash flow (e.g., if customers haven’t paid), or have positive cash flow while showing a loss (e.g., due to high depreciation but good cash collection). It’s all about actual cash moving in and out of the business from day-to-day operations.