Operating cash flow represents the amount of cash generated by the main activities of your business. This metric gives you an idea of how well your business runs and indicates whether you can turn a profit from your company’s activities.
Factors That Go Into Calculating the Operating Cash Flow
For example, if you own a retail business or e-commerce shop, your operating cash flow comes from the sale of goods to individual customers. This type of business may generate cash from other activities, such as renting store space to other shops, teaching classes on how to run a retail business, or generating ad revenue from a blog-based website. However, the cash you generate from these minor activities doesn’t count toward your operating cash flow.
Using the Operating Cash Flow Formula
Calculate your operating cash flow using the direct method or the indirect method. For example, you have a total revenue of $200,000 and operating expenses, such as the cost of labour and equipment maintenance, of $150,000. Your operating cash flow comes from the difference.
To calculate operating cash flow with the direct method, use this equation:
- Total revenue – total operating expense = operating cash flow, or:
- $200,000 – $150,000 = $50,000
To calculate the operating cash flow of your business using the indirect method, adjust the net income of your business by removing any revenue that doesn’t affect your cash, such as changes in accounts payable and accounts receivable.
For example, say the net income of your business is $150,000. Changes in your accounts payable total $25,000, and changes in accounts receivable total $60,000, both of which are non-cash expenses. Accounts receivable is an asset because it reports on cash that hasn’t changed hands yet. You subtract out accounts payable because you still have that cash on hand, and you list it as an increase in working capital.
The operating cash flow for the indirect method looks like this:
- Net income + non-cash expenses – increase in working capital = operating cash flow; or:
- $150,000 + $25,000 – $60,000 = $115,000
What an Operating Cash Flow Means for Your Business
Your operating cash flow gives you an idea of how much cash you have on hand at any given moment. You can plan for future expenditures, create a budget, hire more employees, or give more money back to your investors with that extra cash. Tracking income and expenses in QuickBooks comes in handy when generating custom reports that show your operating cash flow. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.