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Operating cash flow is the cash your business generates from primary business activities in a given period. Company leaders like to separate operating cash flow from financing and investing cash flow to understand how effectively the businesses core operations contribute directly to cash flow. This calculation offers insight into the ongoing ability of the company to create cash and to cover short-term debt.
The formula for calculating cash flow from operations is net income plus depreciation, plus net accounts receivable changes, plus accounts payable changes, plus inventory changes plus operating activity changes. A business could suffer a loss or relatively small profit in a period because of large depreciation. However, it could have strong cash flow since depreciation is an accounting expense but not a cash outflow.
- BusinessDictionary.com: Cash Flows from Operationg Activities
- Morningstar: Cash Flow from Operations
- RSM. "U.S. GAAP vs IFRS: Statement of cash flows," page 2. Accessed July 29, 2020.
- Financial Accounting Standards Board. "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," page 10. Accessed July 29, 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.