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What is Operating Cash Flow (OCF)?

Definition: Operating cash flow (OCF), also known as cash flow from operations, is the total amount of cash generated by a firm during a given period from its core business activities. Operating cash flow is different than a firmís free cash flow (FCF) or net income, which includes the depreciation of assets.

What Does Operating Cash Flow Mean?

What is the definition of operating cash flow? OCF is exclusively related to a firmís operating activities during a specific time period or business cycle (year, quarter or month), and it is used to assess a firmís profitability by including a firmís cash flow. A high OCF helps a firm expand into new markets, develop a new product, and lower its debt. It also indicates a solvent firm that can return shareholder value by distributing cash dividends.

In contrast, firms with a negative operating cash flow for an extended period tend to struggle to meet their financial obligations and are typically forced to borrow money to stay in business.

Letís look at an example.

Example

Christina is an accountant in a construction company. She is asked to construct the statement of cash flows and check out the trend of the cash flow from operating activities over the past four years.

Christina inputs the numbers in the statement from 2012 to 2015, and she finds out that the firmís OCF suggests an upward trend, with a slight decline in 2014. The increase in the OCF has allowed the firm to increase its cash dividends by 12.3% in from 2013 to 2014 and to lower its debt at the same time.

Here is the statement she put together.

Operating Cash Flow Example

You can also see that the changes in working capital indicate that the firm effectively manages its inventories, accounts receivable, accounts payable, and cash, thereby lower its current liabilities.

If Christina wants to find out what percentage of cash from operations is generated by the firmís annual sales, she can use the Operating Cash Flow to Sales Ratio formula:

OCF / Sales = $483.2 / $3,200 = 15.10% in 2015

Summary Definition

Define Operating Cash Flow: OCF is the amount of cash a business generates from its core activities.

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