What is Operating Cash Flow?

Applying for financial support calls for proof of credible operating cash flow going forward. This is how an operating cash flow forecast is calculated.

The Role of Operating Cash Flow

An operating cash flow forecast describes how cash generated exclusively from core trading (operations) is expected to have increased or decreased as at the end of the forecast year.

Operating cash flow arises exclusively from core trading activity. It is the only cash capable of servicing external financing. For that reason it is a crucial component of any business plan, especially if that is to be presented to a bank or other senior lender.

Forecast Net Revenue

This starts with net operating revenue.

It is calculated as operating profit minus cashless provisions; for example depreciation, taxes and gains or losses unconnected with core trading activity. That's why items such as profits or losses from the sale of fixed assets, income from investments or deductions such as dividends are excluded.

Forecast Cash Flow from Working Capital

The Increase or decrease in net current assets (current assets less current liabilities) are then added to net revenue. Net current assets are commonly known as working capital which is the source of financial liquidity.

Forecast changes in working capital from the previous year affects operating cash flow may seem counter intuitiive. That is because an increase in working capital actually ends up decreasing it. Why that is so is explained next.

Forecast Cash Flow from Current Assets

Increases in current assets such as stock or accounts receivable reduce operating cash flow. The reason for that is that increased stock represents an increased financial commitment while higher accounts receivable, an increase in virtual loans to customers.

Forecast Cash Flow from Current Liabilities

In the case of current liabilities, increased trade or sundry creditors represent increased virtual loans from suppliers.

That means they contribute to operating cashflow. Note however this only applies to current liabilities; debts with respect to financing of any kind such as a bank overdraft do not feature.

Reduced current liabilities reduce operating cash flow in turn, as that represents repayment of virtual loans.

Follow the link below to view a working example of the operating cash flow forecast that Figurewizard produces in a simple and straightforward manner.

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