Operating cash flow

The cash a business generated or consumed by running itself, usually presented as net profit adjusted for non-cash charges and for the movements in receivables, inventory and payables.

Example

Northgate's 345,000 of profit plus 180,000 of depreciation, less 230,000 and 190,000 absorbed by receivables and stock, plus 120,000 retained in payables, is 225,000.

Important

Read the reconciliation line by line rather than the total. Two companies can report identical operating cash flow for completely different reasons, and the cause is what predicts next year.

Related terms

• Cash flow statement — The statement explaining how the bank balance moved over a period, split into cash from operating the business, cash spent on or received from long-term assets, and cash raised from or returned to lenders and owners.
• Working capital — The money tied up in ordinary trading. The operating version - receivables plus inventory minus payables - excludes cash and borrowings, and is the one that behaves like a use of money.
• Quality of earnings — How reliably reported profit turns into actual cash, most simply measured as operating cash flow divided by net profit.

Lessons that explain it

• The real cost of running the company is often higher than the books show — Early companies often have below-market founder pay, unpaid invoices, deferred costs and free resources. Normalising the expense base shows what the company will actually cost to run. (10 min)
• The cash flow statement: what actually moved — The statement that cannot be authored the way the other two can, because at the end of it there is a bank balance that either matches or does not. It is where a profitable year reveals whether it was also a solvent one. (12 min)
• When the cash and the profit disagree, believe the cash — Most accounting problems show up as a widening gap between reported profit and cash collected. A few ratios, tracked over time, catch the common ones. (12 min)

All 578 terms in the Investing glossary