Operating Cash Flow

A cash flow is any movement of cash, within the organization or outside the organization. The most important part of the definition is the term 'liquid cash'. Liquid cash basically includes, any form of currency or any negotiable instrument, or any near money that has a hundred percent liquidity, i.e: it can be immediately used for any transaction with an immediate effect. Hence, according to the definition, debtors cannot be considered to be inward cash flow element. Because in case of a debtor, who owes us money, it is receivable at a future date and in most of the cases, an inward cash flow, when he pays us, is observed on the said date. Creditors, credit and lenders, to whom we owe money, cannot be considered to be outward cash flow elements, as money is payable to them at a future date. Such financial aspects of the business organization, are directly entered into the balance sheet.

What is Operating Cash Flow?

From the above definition, it is evident that any sub-term of cash flow, is related to the inflow and outflow of liquid cash into and out of a business organization. This term is strictly related to flow of cash as a result of the operations of the organizations. Experts, in the filed of finance, have often argued about the elements that are to be added up, while one tries to derive the cash flow through operations. On an average, finance and accounting personnel use the following formula to derive a final figure.

Operational Cash Flow = Earnings before interest and taxes + Depreciation - Taxes

The depreciation and taxes in the aforesaid formula, signify the outflow of cash. Practically speaking, the earnings before interest and taxes should be greater than the total of depreciation and taxes. Such a situation is an ideal one and implies more generation of revenue.

Operating Cash Flow Margin
According to any accounting and finance standards, the term 'margin', implies the total net sales minus, cost of goods and services sold and costs incurred thereof. The total cost of goods sold minus the total production value of the same goods, minus costs incurred thereof, gives us a micro figure of revenue and profits. Such margins are usually calculated and analyzed for short terms such as a week, or a month, and in some cases, even a day. The basic intention of such a derivation is simple - to get to know the profit that has been derived in short time periods.

Operating Cash Flow Ratio
Since the introduction of the discipline of cost accounting in the filed of finance, determining or pre-determining values per unit has gained a widespread importance. For example, when it comes to operational cash flow, accountants often calculate some ratios such as 'the amount of income tax payable upon the inward cash flow for the month of June'. This might sound very intricate and complicated, but is a highly instrumental as a financial management tool.

Calculating cash flow through operations is a wise idea as there are many benefits that can be enjoyed from its analysis. To sum up, let me put forth these benefits in 3 words, recognize, realize and reform. This three-step process is simple enough. After one calculates the cash flow figures and ratios for a short time period, it is easy to recognize the performance of the organization. In the next step, the fault or the defect is realized, upon which a reform can be implemented to rectify the fault. The result - an enhanced and improved inward, cash flow.