Operating Cash Flow – Definition, Formula, and Examples

Operating Cash Flow
  • What is the operating cash flow formula?

The cash that is generated from the normal operations of a business is called cash flow from the operating activities formula. This cash flow is generally from the operating activities, investing activities, as well as from financing activities, which helps to provide an intuition of the business.

Here, we have a negative operating cash flow as well as positive operating cash flow, where a negative figure tells us that a company is not able to pay its bills and is in debt or not in a sound state.

  • Cash flow formula:

The formula for calculating cash flow can be depicted into 3 parts as follows:

  1. Free Cash Flow 
  2. Operating Cash Flow 
  3. Cash Flow Forecast 

Here, these formulas show how the money is moving in and out of the business. Although, a cash flow formula calculation is different from the calculation of accounting for income or expenses.

  1. Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure
  2. Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital
  3. Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

So, here we have presented the free operating cash flow formula, formula operating cash flow as well as Cash Flow Forecast.

  • The formula for operating cash flow:

In order to calculate cash flow within a particular period, you need net operating cash flow formula. So, it is as follows:

  • Operating cash flow formula with the short calculation: (Direct Method)

# Operating Cash Flow = Net Income + Non-Cash Expenses – Increase in Working Capital

                                                                           OR

# Operating Cash Flow = Total Revenue – Operating Expense

  • Operating cash flow formula with the long calculation: (Indirect Method)

# Operating Cash Flow = Net Income + Depreciation + Stock-Based Compensation + Deferred Tax + Other Non Cash Items – Increase in Accounts Receivable – Increase in Inventory + Increase in Accounts Payable + Increase in Accrued Expenses + Increase in Deferred Revenue

                                                                            OR

# Operating Cash Flow = Net Income +/- Changes in Assets & Liability + Non-Cash Expenses

  • How to calculate free cash flow

For the calculation of free cash flow, you need an operating free cash flow formula. And also find out the following:

  1. Net income: The Net income is the total income of your business after deduction of all the expenses of the business.
  2. Depreciation/Amortization: Some equipment’s in the business loses its value over time and is thus depreciated. So, the depreciation on the assets should also be known for the calculation of free cash flow. 
  3. Capital Expenditure: Capital Expenditure includes all the money that is spent on fixed assets, like land, real estate, or equipment in the business for business purposes.
  4. Working Capital:  The Working Capital is depicted by the difference of assets and liabilities of the business. So, you should have knowledge about the assets and liabilities of the business as well. 

So, here the Changes in assets and liabilities will comprise of the following:

  • + Depreciation
  • + Stock built recompense
  • + Overdue tax
  • + Other non-cash items
  • + Accounts payable

And the Working capital items will comprise of the following:

  • Accounts receivable
  • Inventory

So, by using all the above information needed in the operating cash flow ratio formula you can calculate it as:

  • Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure
  • Operating cash flow formula example:

  • Example 1:

We have the following financial statement of GKL as:

# Net income: $ 200,000

# Depreciation: $ 16,000

# Change in accounts receivable: + $ 60,000

# Change in inventory: – $ 30,000

# Change in accounts payable: – $ 15,000

Solution:

Using the operating cash flow formula finance, we can find about the business of GKL,

  • Operating Cash Flow = Net Income +/- Changes in Assets & Liability + Non-Cash Expenses
  • Operating Cash Flow = $ 200,000 – $ 60,000 + $ 30,000 – $ 15,000 + $ 16,000

 = $ 200,000 – $ 60,000 + $ 30,000 + $ 1000

= $ 200,000 – $ 60,000 + $ 31,000

= $ 200,000 – $ 29,000

= $ 1,71,000

So, here the cash flow from operating activities is a positive figure depicting the cash in the business is enough to meet the expenses of the business.

  • Example 2:

You are given with the following annual information about a company as:

# EBIT (Earnings Before Interest and Taxes) = $ 5679

# Depreciation = $ 1200

# Taxes = $ 340

You need to calculate the annual Operating Cash Flow.

Solution:

Annual operating cash flow formula for Operating Cash Flow (OCF) = EBIT + Depreciation – Taxes

= $ 5679 + $ 1200 – Taxes = $ 340

= $ 6539

So, after-tax operating cash flow calculated with the after-tax operating cash flow formula for the company is $ 6539 

  • Example 3:

Company details are mentioned here, we need to calculate CFO with both direct and indirect methods.

Particulars Amount 
Account receivable $ 14,000.00
Inventory $ 2,000.00
Account payable $ 5,000.00
Sales $ 325,000.00
Gross Profit $ 200,000.00
Income Tax $ 16,000.00
Administrative cost $ 10,000.00
Depreciation $ 2,000.00
Gain & Losses from Financing & Investment $ 0
Net Income $ 300,000
Account receivable $ 14,000.00
Inventory $ 2,000.00
Account payable $ 5,000.00

Solution:

Calculation of net cash flow from operating activities formula by Direct Method–

  • Cash receipt = $ 3,25,000 – $ 14,000= $ 3,11,000
A B
1 Account receivable $ 14,000.00
2 Inventory $ 2,000.00
3 Account payable $ 5,000.00
4 Sales $ 325,000.00
5 Gross Profit $ 200,000.00
6 Income Tax $ 16,000.00
7 Administrative cost $ 10,000.00
8 Depreciation $ 2,000.00
9 Gain & Losses from Financing & Investment $ 0
10 Net Income $ 300,000
11 Account receivable $ 14,000.00
12 Inventory $ 2,000.00
13 Account payable $ 5,000.00
14
15
16 Cash receipt  = B4 – B1
17 Cash payment = B7 – B8 
18 Cash expense = B5 – B12 – B3
19 Cash Tax = B6 

Calculated table:

A B
1 Account receivable $ 14,000.00
2 Inventory $ 2,000.00
3 Account payable $ 5,000.00
4 Sales $ 325,000.00
5 Gross Profit $ 200,000.00
6 Income Tax $ 16,000.00
7 Administrative cost $ 10,000.00
8 Depreciation $ 2,000.00
9 Gain & Losses from Financing & Investment $ 0
10 Net Income $ 300,000
11 Account receivable $ 14,000.00
12 Inventory $ 2,000.00
13 Account payable $ 5,000.00
14
15
16 Cash receipt  $ 3,11,000
17 Cash payment $1,93,000
18 Cash expense $ 8,000
19 Cash Tax $ 16,000.00
  • Cash Expense = 10,000 – 2,000 = $ 8,000
  • Cash Tax = $16,000

Now, we have the following information as:

A B
16 Cash receipt  $ 3,11,000
17 Cash payment $1,93,000
18 Cash expense $ 8,000
19 Cash Tax $ 16,000.00
  • CFODirect = Cash Receipt – Cash Payment – Cash Expense – Cash Interest – Cash Taxes
  • CFODirect = $ 3,11,000 – $ 1,93,000 – $ 8,000 – 0 – $ 16,000 = $ 94,000
A B
16 Cash receipt  $ 3,11,000
17 Cash payment $1,93,000
18 Cash expense $ 8,000
19 Cash Tax $ 16,000.00
CFO formula (direct) = B16 – B17 – B18 – B19

So, CFO will be $ 94,000 by using a direct operating cash flow calculator.

Now, we will be solving the same example with Indirect Method:-

A B
1 Account receivable $ 14,000.00
2 Inventory $ 2,000.00
3 Account payable $ 5,000.00
4 Sales $ 325,000.00
5 Gross Profit $ 200,000.00
6 Income Tax $ 16,000.00
7 Administrative cost $ 10,000.00
8 Depreciation $ 2,000.00
9 Gain & Losses from Financing & Investment $ 0
10 Net Income $ 300,000
11 Account receivable $ 14,000.00
12 Inventory $ 2,000.00
13 Account payable $ 5,000.00
14
15 Change in operating =SUM(B1:B3)
16 CFO Indirect =B15+B10+B9+B7

So, Suppose the initial value is zero.

  • Total changes of operating = $ 14,000 + $ 2,000 + $ 5,000 = $ 21,000
A B
1 Account receivable $ 14,000.00
2 Inventory $ 2,000.00
3 Account payable $ 5,000.00
4 Sales $ 325,000.00
5 Gross Profit $ 200,000.00
6 Income Tax $ 16,000.00
7 Administrative cost $ 10,000.00
8 Depreciation $ 2,000.00
9 Gain & Losses from Financing & Investment $ 0
10 Net Income $ 300,000
11 Account receivable $ 14,000.00
12 Inventory $ 2,000.00
13 Account payable $ 5,000.00
14
15 Change in operating $ 21,000
16 CFO Indirect $ 3,31,000
  • CFOindirect = Net Income + Gain & Losses from Financing & Investment + Non-cash charges + Charges in Operating accounts
  • CFOindirect = $ 300,000 + $ 0 + $ 10,000 + $ 21,000 = $ 3,31,000

So, CFO will be $ 3,31,000 by using indirect operating cash flow formula calculator.

Also Read Here- Infinite Banking – Overview, How It Works, Advantages and Disadvantages

Frequently Asked Questions

  • What is the operating cash flow formula?

The cash that is generated from the normal operations of a business is called cash flow from the operating activities formula. This cash flow is generally from the operating activities, investing activities, as well as from financing activities, which helps to provide an intuition of the business.

  • What is the operating cash flow formula?

The net cash flow from operating activities can be calculated by finding depreciation, amortization, stock, non-cash-based expenses, etc. So, its formula is as; operating cash flow = net income + non-cash expenses + changes in working capital.

  • How do you calculate CFO?

We can calculate CFO by using the formula of CFO as: CFO = Net Income + Depreciation & Amortization – Change in Working Capital

Conclusion:

So, the cash that is generated from the normal operations of a business is called cash flow from the operating activities formula. This cash flow is generally from the operating activities, investing activities, as well as from financing activities, which helps to provide an intuition of the business. And depending upon the information available in the business we have different operating cash flow formulas such as operating cash flow margin formula, net cash flow from operating activities formula, after-tax operating cash flow formula, free operating cash flow formula, etc to calculate operating cash flow.

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