Operating Cash Flow. Why it is Important?

Operating cash flow is a measurement of a business’s cash flow and uses, and is the best indicator of business profitability. It demonstrates the changes in working capital, such as receivables and inventory, and removes the many of the opportunities for manipulation.

Cash is what keeps businesses running, and a high operating cash flow is an excellent indicator of how a business is doing.

It’s a Better Gauge of Success

Operating cash flow is one of the best ways to show the success of your business. Businesses that generate a lot of cash are obviously more successful than those that have very little cash flow, and the operating cash flow shows how much is being generated and in what way. An operating cash flow that is higher than the statement of net income is a good indicator of success, since net income takes into account non-cash items that have little to do with the way the business is doing in terms of profit.

It’s More Accurate

The operating cash flow of a company removes other inclusions such as non-cash items and non-cash expenditures from the income statement, which provides a clearer picture. Under GAAP, or Generally Accepted Accounting Principles, cash flow is significantly more difficult to manipulate. Both depreciation and amortization can disguise how a business is doing when it comes to net income reports— these items are not included in the operating cash flow.

Investors Find It Important

Investors see operating cash flow as a cash equivalent to net income. It helps them spot attempts at manipulation and shows which businesses are a good choice for investing in. Without operating cash flow, investors are unlikely to be interested in a company, since cash is what keeps a company moving forward. As previously stated, cash flow is harder to manipulate, so investors see it as a better indication of a promising investment venture, than just a regular income statement.

It Shows How Business Is Generated

The operating cash flow removes non-cash items and expenditures, leaving just what the business is doing in terms of real money. It’s broken down into four sections: investing activities, operating activities, supplemental information, and financing activities.

It’s Important for Long-Term Success

Businesses without a strong operating cash flow are likely on their way to failure, as cash is what keeps a business afloat. Some businesses elect to get bad credit business loans to keep their business afloat in the beginning stages of the business, before an established clientele is created, and that is reflected in operating cash flow.

Cash Is King

No matter how creative a business may be, or how they run it or how profitable it may seem, it all comes down to cash. A business that cannot generate cash cannot survive in today’s competitive market. Operant cash flow is the best indicator of success because there’s no way for a business to survive without it.

Operating cash flow is truly the lifeblood of a business, and without it, a business will fail without exception. The best way to gain solid investors is to have a promising operating cash flow.