Operating cash flow refers to the net change in your company's cash during a given period, based solely on primary business activities. Creditors have interest in your operating cash flow when deciding whether you are well-positioned to take on additional debt.
The basic formula for operating cash flow is earnings before interest and taxes, or EBIT, plus depreciation and minus taxes. This equation reflects cash flow you generate from periodic profit, while adjusting for the fact that depreciation is a non-cash expense and taxes create a cash outflow. As an example, assume your company made $150,000 in EBIT during the previous quarter. Depreciation was $10,000 and taxes were $35,000. Therefore, operating cash equals $150,000 plus $10,000, minus $35,000, which is $125,000.
Cash Flow Implications
Operating cash flow is one of a handful of tools used by creditors to evaluate your ability to borrow. In general, strong operating cash flow for several periods reflects your ability to take on additional debt or expenses. Low or negative operating cash flow would make it difficult for a creditor to justify a loan. Investing in expansion or diversification are alternatives to taking on new debt with strong cash flow.
- Credit Research Foundation: The Trade Creditor's Guide to the Statement of Cash Flows
- U.S. Securities and Exchange Commission. "Beginners' Guide to Financial Statement." Accessed Mar. 19, 2020.
- Office of the Washington State Auditor. "Statement of Cash Flows." Accessed Mar. 19, 2020.
- U.S. Securities and Exchange Commission. "AT&T Form 10-K 2012." Accessed Mar. 18, 2020.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.