Operating Cash Flow Definition – Formula, Example & Importance

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Operating Cash Flow Definition and Example

Operating Cash Flow Definition – “The net movement of cash from the operations side of a business, as opposed to cash related to investments or to a company’s financing”.

It is also known as cash flow from operating activities.These activities includes all the cash inflows and outflows from the operations of the business. It does not takes into account the cash inflows or outflows from interest or investments. To be very precise, the cash inflows should always be greater than the cash outflows. This implies that the business operations are running profitably.

Formula

Operating Cash Flow = Total Operating Revenues – Total Expenses

Or

Operating Cash Flow = Net Income +/- Change in assets and liabilities + Non cash expenses

Operating Cash Flow Example

To understand operating cash flow definition more clearly, let’s discuss an example

Anjali runs a flower shop and her financial statement consists of the following items –

Net income earned during the year – Rs.1,00,000
Change in debtors – +Rs. 60,000
Change in overdraft – -30,000
Depreciation – 5,000

Operating Cash Flow = 1,00,000 – 60,000 – 30,000 + 5000

=15,000

Related Financial Terms of Operating Cash Flow

Importance of Operating Cash Flow – Why Operating Cash Flow is Used?

It is one of the important reflector whether company is making enough profits with its operations. Creditors and investors see it as a good sign. If cash inflows are greater than the cash outflows, this means that company is efficiently managing its operations.

It is also acts a tool to make the forecast regarding the health of the company. Therefore it is mandatory for the companies for communicate the numbers to the stake holders. This is done through reflecting it in Cash Flow Statement and other financial statements.

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