Your operating cash flow shows how well your company produces positive cash flow from operations in support of the business.  If your Net Sales are less and your operating expenses are negative more than positive, you have a problem.

Negative operating cash flow tells you that you are poorly managing your core business activities.  Fail to make the necessary changes to generate positive cash flow from operations consistently and you will go out of business.

Overview

Cash Flow from Operations represents the amount of money a business brings in from its ongoing business activities, such as service delivery and manufacturing of goods purchased by customers.  It is the first section depicted on a company’s cash flow statement and is one of the most critical measures of business success.

Operating cash flow does not represent cash from investing and financing activities.  It measures the financial success of a company’s core business activities.

The indirect method for measuring Cash Flow from Operations begins with net income from the P&L Statement, then adds back noncash items like depreciation expenses plus changes in Working Captial to arrive at the amount of Cash Flow from Operations.  Changes in Working Capital are calculated by subtracting current liabilities from current assets.

The direct method tracks all transactions in a period on an accounting cash basis using actual cash inflows and outflows on the cash flow statement to determine the cash flow from operations.

Smart business leaders use their cash flow from operating activities to optimize their business activities sources and uses of cash.  They know that their operating cash flow is the best indicator of the immediate health of their company relative to their being able to pay their current expenses and themselves.