What Is Operating Cash Flow and How Does It Affect Your Business?

I learned the hard way the importance of cash flow in a business. Years ago, when I finally decided to start Backbone America, I followed all sorts of trends. I spent money on organizations, fell prey to marketing schemes, and just hemorrhaged money. As a business advisor, I should have known better. The thing is, it wasn’t that spending money to grow my business was a bad thing. Rather I didn’t respect operating cash flow.

Cash flow is an important aspect of any business’s financial health. Operating cash flow (OCF) in particular can be a great indicator of the overall performance of a company. It also shows a company’s ability to sustain itself over time. That’s why today I want to share with you what OCF is, how to calculate it, and why monitoring OCF should be part of your overall business strategy.

What Is Operating Cash Flow?

Operating cash flow (OCF) is the profits that comes into a business from ongoing operations. It’s the amount before any investments or financing activities take place. This means that all revenues generated by selling goods or services are included in the calculation. Also keep in mind that expenses related to long-term investments such as property purchases are not factored into OCF calculations. This type of analysis helps businesses measure their short-term liquidity position. It can tell them whether they have enough money on hand to meet their current obligations. It also shows if they need additional financing sources, like bank loans or venture capital investment to stay afloat.

How Do You Calculate Operating Cash Flow?

The formula for calculating operating cash flow looks like this: Net Income + Non-cash Expenses – Change in Working Capital = Operating Cash Flow. To break this down further, net income refers to total profits earned after deducting taxes and other costs associated with running a business. Non-cash expenses refer to items such as depreciation which don’t involve actual payments being made out from the company’s coffers.  Non-cash expenses still affect profitability figures nonetheless. Finally, change in working capital measures fluctuations between current assets (such as inventory) versus current liabilities (debts due within one year). When these three variables are added together we get our final result, operating cash flow dollars.

Why Monitor Your Company’s Operating Cash Flow?

Analyzing operating cash flows gives businesses valuable insights on their daily operational activities. This allows business owners to they make informed financial decisions. It can help with budget allocations moving forward or address potential gaps when without significantly impacting their bottom line over time. Furthermore, keeping track of these key performance indicators also allows companies to their liquidity position more accurately. Doing so can help prevent them from getting overextended during times when sales may be slow or unexpected expenditures arise. It can also help avoid potentially disastrous consequences if left unchecked.

Conclusion

The bottom line is by regularly monitoring operating cash flows, businesses can ensure that they remain financially healthy. Understanding and monitoring your company’s operating cash flow is essential for any business to stay afloat. With the ability to identify potential problems before they arise, companies can make better decisions regarding budget allocations and liquidity management which will help them remain profitable in the long run.