3.10. Operating Cash Flow
Lesson objective
Follow cash generated by core operations.
Operating Cash Flow normally begins with profit and adjusts for non-cash items and working-capital movements. It seeks to show the cash generated by the company's main activities.
OCF may increase temporarily if a company delays payments or sells existing inventory, and it may fall when receivables or inventory build.
Compare OCF with Net Income over several years to evaluate earnings quality and stability.
Operating cash flow bridges accounting profit to cash
Under the common indirect presentation:
Net income + non-cash items ± working-capital changes = Operating cash flow
Indirect bridge
Net income = $100M. Add $30M depreciation, subtract a $25M increase in receivables, and add a $10M increase in payables. Simplified OCF = $115M. Profit and cash differ because accounting recognizes some items at different times and includes non-cash expenses.
When OCF changes sharply
Check receivables, inventory, payables, deferred revenue, taxes, restructuring, compensation, and whether the movement is temporary timing or a recurring pattern.
In Finzati
Cash Flow Statement shows OCF and its components.
What you should remember
- One year may be distorted by temporary working-capital movements.
- Working capital can have a large effect on OCF.
Practice
Identify years when OCF was lower than Net Income and investigate possible causes.