Operating cash flow

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In financial accounting, operating cash flow (OCF), cash flow provided by operations or cash flow from operating activities, refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities.^[1]

Operating cash flow = Cash generated from operations less taxation and interest paid, investment income received and less dividends paid gives rise to operating cash flows per International Financial Reporting Standards.^[2]

To calculate cash generated from operations, one must calculate cash generated from customers and cash paid to suppliers. The difference between the two reflects cash generated from operations.

Cash generated from customers

         revenue as reported 
         - increase (decrease) in trade receivables
         - investment income (disclosed separately)
         - other income that is non cash and non sales related

Cash paid to suppliers

         costs of sales
         + other expenses as reported less 
         - increase (decrease) in trade payables
         - non cash items such as depreciation, provisioning, impairments, bad debts, etc.
         - financing expenses

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP metric that can be used to evaluate a company's profitability based on net working capital.

The difference between EBITDA and OCF would then reflect how the entity finances its net working capital in the short term. OCF is not a measure of free cash flow and the effect of investment activities would need to be considered to arrive at the free cash flow of the entity.

[edit] References

^ Ross, Stephen, Randolf Westerfield and Bradford Jordan Fundamentals of Corporate Finance
^ International Accounting Standards 7, Cash Flow Statements (January 2007)