What is Operating Cash Flow

Business planning must always include cash flow forecasts. The most important of these will be the operating cash flow forecast.

Debt and Cash Flow

An operating cash flow forecast identifies proposed sources of cash arising exclusively from the trading activity of a business, including commercial credit. Click here to view an example of a Figurewizard operating cash flow florecast.

The operating cash flow forecast matters enormously as it illustrates how well a business (especially one that is expanding) is going to able to cope with servicing its borrowings, including a bank overdraft, asset finance and other senior debt going forward.

The first step is to calculate the changes to cash flow arising from current assets and liabilities as follows:

Creditors and Operating Cash Flow

Assume that at the end of the previous financial year 50,000 was owed to trade creditors and at the end of the current year that figure had risen to 60,000.

This amounts to creditors increasing their loans to the business by 10,000 making it a positive cash flow movement. If however creditors were owed 40,000 at the end of the current financial year instead, loans from creditors and therefore operating cash flow would have fallen by 10,000.

Debtors and Operating Cash Flow

Here the movement is the opposite of the above: Take for example cash owed to the business by its debtors (i.e. credit customers and prepayments) at the end of the previous financial year of 50,000 and an increase at the end of the current year to 60,000.

In this case that represents increased loans made to debtors of 10,000 and therefore a reduction in cash flow. If however the current year figure were to fall to 40,000 instead, that would represent improved cash collection, increasing operating cash flow by 10,000.

How Operating Revenue is Calculated

Cash flow movements arising from debtors and creditors are next added to net operating revenue.

Depreciation and provisions for bad debts are added back to operating revenue because these do not involve any actual transfers of cash as are interest charges as these do not arise from trading (i.e. operating) activity.

Similarly profits from the sale of fixed assets are deducted as these do not arise from trading activity either.

How Net Cash Flow is Calculated

Once operating cash flow has been calculated, non-operating activities such as tax payments, the purchase or sale of fixed assets and so on are added to arrive at net cash flow.

View Examples of Cash Flow Forecasts

Figurewizard forecasts include operating and net cash flow forecasts. There is a link below to a working example of these. This also provides more in depth explanations with examples.

Another link for our What If calculator and planner enables you as a visitor to make changes to margins, overheads and investments in our working example so you can view the consequent changes that makes to both operating and net cash flows.

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