How To Calculate Operating Cash Flow


Operating cash flow is a corporate accounting process that helps to give a clearer picture of a company’s true cash position. There are certain elements of the corporate ledger that are not allowed to be a part of the operating cash flow that can eliminate artificially inflated numbers. When you are looking at a company’s operating cash flow, you are seeing the real money the company has on hand without the use of accounting practices that can legally but inaccurately boost a bottom line.

What Is Included In Operating Cash Flow?

Actual receivables collected is considered real revenue and a part of operating cash flow. Other parts of operating cash flow include stock options paid out, accounts payable on the books but not paid (considered expenses), real operating expenses, salaries and amortization of loans and interest. These are all considered real income that can be used to calculate real cash flow.

What Is Not Included?

One of the most significant types of accounting events not included in operating cash flow is income not realized. For example, if the company invoices a large order but has not yet collected the funds, then that order cannot be a part of the operating cash flow. Money promised but not collected is not considered part of the operating cash flow because of the desire to get a true picture of the company’s cash status.

Where The Money Comes From

In operating cash flow, the only revenue reported is revenue from the company’s primary business activities. These include buying materials, selling inventory, paying wages to workers directly involved in providing services to customers or the company and any expenses involved in selling products or providing customer service.

Money That Is Not Included

Any income derived from operations not critical to the company’s survival are not included in operating cash flow. Any revenue derived from investments outside of the company’s primary interests, revenue from the sale of company equipment or real estate and any loans or other sources of funding secured by the company for any reason.

Why Is Operating Cash Flow So Important?

Companies considering offering funding to an organization are going to want to see that organization’s operating cash flow because it is an excellent indicator of the organization’s financial health. Because operating cash flow does not allow revenue or expenses directly related to the organization’s prime operations, it gives a very clear picture as to how well the company is doing in bringing in revenue to sustain its own business operations.

When a company reaches out for funding or tries to attract investors, those investors and funding organizations will want to see the company’s operating cash flow. This is why so many companies throughout the country focus on maintaining a strong balance between the cash they bring in and the money they spend on core operations.