Operating cash flow

Operating cash flow is the net amount of cash that an organization generates from its operating activities. This information is used to determine the viability of the core operations of a business. Operating cash flow can be a more reliable indicator of financial health than the reported net income of a business, since net income can be altered by non-cash revenue and expense transactions.

To calculate operating cash flow, subtract all depreciation, income taxes, and finance-related income and expenses from net income. Conversely, it can also be calculated by subtracting all operating expenses (less depreciation) from revenues. For example, a business reports net income of $100,000, depreciation of $8,000, and income taxes of $30,000. Its operating cash flow is:

$100,000 Net income + $8,000 Depreciation + $30,000 Income taxes
= $138,000 Operating cash flow

A more precise calculation of operating cash flow also adds or subtracts any changes in working capital during a period.

Operating cash flow is closely watched by analysts, since it can provide insights into the financial condition of a business. In particular, compare the amount of this cash flow to a company's ongoing fixed asset purchasing requirements, to see if it is generating enough cash flow to fund its capital base. If not, it will either be necessary to obtain additional funding to maintain a sufficiently new set of fixed assets, or management can elect to replace assets at longer intervals, which can lead to higher repair costs and more production downtime.

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