Operating cash flow
The cash a business generates from its core operations, before financing or investing activities. The truest measure of business health.
Operating cash flow (OCF) is the cash that comes in from running the business minus the cash that goes out to keep it running — sales receipts minus operating expenses paid in cash, with adjustments for changes in working capital.
It's distinct from net income for a critical reason: net income includes non-cash items (depreciation, accruals) and is heavily influenced by accounting choices. Cash flow is harder to fudge. A profitable company that can't generate cash is in trouble; a company with strong cash flow is fundamentally solid even if accounting shows a paper loss.
Three buckets show up on the cash flow statement:
- Operating — from core business activity
- Investing — purchases of equipment, acquisitions, sales of assets
- Financing — raising or returning capital (loans, dividends, share issuance)
A healthy business eventually has positive operating cash flow large enough to fund investing activities — the company funds its own growth. Startups often have negative OCF and rely on financing cash flow (investor money) to bridge until OCF turns positive.
Watch the trend: improving operating cash flow even with flat revenue means margins or working capital are improving. Both are healthy signals.
See also
- Free cash flow — Operating cash flow minus capital expenditures. The cash left over after running and maintaining the business — available for growth, debt paydown, or owners.
- Working capital — Current assets minus current liabilities. A measure of short-term liquidity — what a business has on hand to cover near-term obligations.
- Gross margin — Revenue minus the direct cost of delivering that revenue, divided by revenue. The percentage of each dollar of revenue you keep before operating expenses.
Ask Cashowa about operating cash flow
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