Operating cash flow is the amount of money brought in by a company’s routine business activity. Operating cash flow, in essence, indicates whether a company is earning enough consistent revenue to stay in business and grow. <\/p>

In a nutshell, it shows the amount of cash flow generated by the company’s operations without taking into consideration extra revenue sources such as interest or investments. This is a significant factor because it enables creditors and investors to analyze how successful a company\u2019s operations are and whether the company is making enough money from its core activities to stay afloat and grow.<\/p>

Again, it is the amount of money a company makes from its sales, excluding the costs of long-term capital investments and securities investments. <\/p>

That is to say, if the company is unable to generate sufficient consistent revenue, it may need to seek outside funding to expand.  <\/p>

The section of the cash flow statement that displays how much money a company earns through day-to-day activities is called operating cash flow. It’s obtained by subtracting revenue from operational expenses.<\/p>

Furthermore, the operating cash flow can be calculated using one of the two methods\/formulas. The first approach, also known as the direct method, involves subtracting operating expenses from total proceeds.<\/p>

Operating Cash Flow and Its Applications<\/span><\/h2>

To apply the cash flow from operating activities. One of the two ways shown below is adopted.<\/p>

#1. Direct Method <\/h3>

This method is highly recommended by the Financial Accounting Standards Board (FASB). It is more detailed than the indirect method. This method, however, has a verification check and the indirect method is used to verify the direct method’s accuracy.  For this reason, most businesses\/firms prefer the indirect method and this is a great limitation of the direct method.<\/p>

This shouldn’t discourage you, as we all know the saying that \u201cEverything that has an advantage, has a disadvantage.”<\/p>

Meanwhile, as its name implies, it considers the origin of the cash flows and records it on the statement sheets\/report.<\/p>

Example<\/span><\/h3>

Below is a typical example of using the direct method to generate a cash flow statement<\/p>

Bellmall Mircosoft Inc.<\/strong>
Cash flow statement, for the year 202<\/strong>3
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0On the 30th of November<\/strong><\/p><\/blockquote><\/figure>

OPERATING ACTIVITIES CASH FLOWS<\/strong><\/p>

Cash obtained from sales                                                   $80,000<\/strong><\/td><\/tr>

Cash spent on income taxes                                               $2,500                                       <\/strong><\/td><\/tr>

Cash spent on salaries                                                        $20,000<\/strong><\/td><\/tr>

Cash spent on commodities                                               $25,000<\/strong><\/td><\/tr>

Cash spent on interest                                                        $1000<\/strong><\/td><\/tr>

TOTAL CASH FLOW INFLOW BY OPERATING ACTIVITIES          $31,500<\/strong><\/td><\/tr><\/tbody><\/table><\/figure> INVESTING ACTIVITIES CASH FLOWS<\/strong><\/p> Cash spent on assets and property                                               $150,000<\/strong><\/td><\/tr> TOTAL CASH INFLOW BY INVESTING ACTIVITIES                       $150,000<\/strong><\/td><\/tr><\/tbody><\/table><\/figure> FINANCING ACTIVITIES CASH FLOWS<\/strong><\/p> Income from credit line                                                                       $20,000<\/strong><\/td><\/tr> Payments made on long-lived debt                                                          –<\/strong><\/td><\/tr> Income from long-lived debt                                                              $120,000<\/strong><\/td><\/tr> TOTAL CASH INFLOW BY FINANCING ACTIVITIES                          $140,000<\/strong><\/td><\/tr><\/tbody><\/table>