Paying suppliers, contractors, and consultants.<\/li>\n<\/ul>\n\n\n\nWhy Would a Company Use Operating Cash Flow?<\/h2>\n\n\n\n
The beauty of operating cash flow is how it strips out various factors that get in the way of assessing the core health of a business. <\/p>\n\n\n\n
For example, a company may have just made a large sale and is waiting for money to enter its accounts. On its year-end profit-and-loss statement, it will record the sale as revenue, making the company appear healthy. However, if the firm cannot collect the money, perhaps because the client pays late, it has no cash inflows \u2013 something that a look at the OCF will reveal. <\/p>\n\n\n\n
Even so, operating cash flow isn\u2019t always helpful for measuring the financial solvency of a firm. For instance, if capital spending is high and the company applies accelerated depreciation, the operating cash flow will appear chronically low even if the business has enough cash on hand to meet all its needs. <\/p>\n\n\n\n
To remedy this, firms also report free cash flow (FCF). This expanded definition of a company\u2019s cash flow avoids the artificial deflation of its total cash reserves, which often appears after working capital increases are taken into account. <\/p>\n\n\n\n
Indirect and Direct Methods for Calculating Operating Cash Flow<\/h2>\n\n\n\n
There are two methods of calculating OCF: indirect and direct.<\/p>\n\n\n\n
Indirect Method<\/h3>\n\n\n\n
The indirect method of calculating OCF takes net income and applies various correction factors to it, reflecting the status of non-cash accounts, such as accounts payable, accounts receivable, and capital depreciation. The reason accountants call it \u201cindirect\u201d is because OFC is inferred from the company\u2019s net income position. <\/p>\n\n\n\n
An increase in accounts receivable, for instance, indicates that the firm has earned money, but the cash has not yet been received. Therefore, it must be subtracted from the net income. <\/p>\n\n\n\n
By contrast, accounts payable implies that the company has incurred expenses, but they have not yet been paid. This extra cash would need to be added back to net income to produce the OCF statistic. <\/p>\n\n\n\n
Direct Method<\/h3>\n\n\n\n
The other method is for the company to record all transactions in cash and summarize its cash position for a particular accounting period on that basis. For instance, it might keep tabs on cash paid to suppliers and vendors, workers, and tax authorities when measuring out-flows, and sources of income, such as sales and dividends, when measuring in-flows.<\/p>\n\n\n\n
Conclusion<\/h2>\n\n\n\n
Operating cash flow is a useful tool businesses use to determine their net cash position. It is valuable because it informs companies about their ability to pay for the inventory and services they need right now, regardless of their profitability. However, free cash flow might be more helpful to companies with accelerating depreciation programs.<\/p>\n","protected":false},"excerpt":{"rendered":"
In business, you will frequently come across the term \u201coperating …<\/p>\n
Operating Cash Flow: A Quick Guide<\/span> Read More \u00bb<\/a><\/p>\n","protected":false},"author":16,"featured_media":632,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"","footnotes":""},"categories":[4],"tags":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/631"}],"collection":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/users\/16"}],"replies":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/comments?post=631"}],"version-history":[{"count":3,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/631\/revisions"}],"predecessor-version":[{"id":3828,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/posts\/631\/revisions\/3828"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/media\/632"}],"wp:attachment":[{"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/media?parent=631"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/categories?post=631"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.smallbizgenius.net\/wp-json\/wp\/v2\/tags?post=631"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}