Financial
Operating Cash Flow
Operating Cash Flow (OCF) measures the cash generated from a company's regular business operations, reflecting the company's ability to generate sufficient revenue to maintain and grow operations without relying on external financing.
HOW TO MEASURE
OCF is calculated by adjusting net income for non-cash items such as depreciation, changes in working capital, and other operating expenses. This metric shows the actual cash flow generated from business activities.
HOW TO IMPROVE
Enhance Receivables Collection: Improve collection processes to shorten the payment cycles from customers.
Manage Payables Effectively: Extend payables where possible without incurring penalties to better manage cash outflows.
Optimize Inventory Management: Reduce excess stock to free up cash while ensuring the inventory levels meet the demand.
Cost Control: Minimize unnecessary operational expenses to conserve cash.
Revenue Growth: Focus on activities that directly increase sales and improve customer retention.
FORMULA
Operating Cash Flow=Net Income+Non-Cash Expenses+Changes in Working Capital
EXAMPLE
A software company has a net income of $120,000, depreciation expenses of $20,000, and an increase in accounts receivable of $10,000 (which is a cash outflow). The OCF would be: $120,000+$20,000−$10,000=$130,000
DEPARTMENT USAGE
Leadership: Uses OCF to make informed strategic decisions about investments, growth opportunities, and operational adjustments.
Finance: Monitors and manages the company’s cash flow to ensure sustainability and plan for future expenditures.
Operations: Utilizes cash flow information to optimize operational efficiency and cost management.
Sales: Adjusts strategies based on cash flow insights to balance revenue generation with cash received.
Product: Aligns product development cycles with cash flow realities to avoid overinvestment in new developments.
Operating Cash Flow is essential for evaluating the immediate financial health of a company and its capacity to sustain operations independently.
View the collection of Metrics Workshops.