Operating Cash flow: The Facts You Need to Know

4 February 2015

Operating cash flow is one of those phrases that we know we should pay more attention to but there always seems to be something else to think about. Surely cash flow will look after itself if we continue to bring in more money than we spend, right? Wrong!

This post highlights the facts you need to know about operating cash flow because it can be the difference between success and failure. So here are the basics…

What is operating cash flow?

In simple terms, it is the amount of cash available within your business as a result of day to day activity. In financial terms your operating cash flow can be defined as:

"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"


Who needs to know about Operating Cash flow?

Everyone! It doesn’t matter what you are selling or how big your company is, having a positive and healthy operating cash flow level will ensure your business succeeds.

How do I calculate my Operating Cash flow?

Calculating your cash flow couldn’t be easier and should be a part of your regular management meetings.

You will need some basic figures to hand:

With these figures to hand, simply add up the amount of cash that is coming in and out of the business. Subtract outgoings from incomings and the remaining amount is the cash within your business. But be careful, this figure can change at any time depending on any of the above figures changing. It is easy to think about operating cash flow as a static figure and forget the impact any one of these elements could have on it.

Put simply, without a robust level of operating cash flow within your business, your business will struggle to operate so it is important to get this calculation accurate and review it regularly.

How do I manage my operating cash flow?

There are a number of elements you can monitor to ensure your operating cash flow levels are optimised and we cover these in 10 Top Tips to Better Manage Your Operating Cash Flow From Operations but in addition to these it is worth investing in a regular, accurate forecasting tool.

It is ok to know what your operating cash flow levels are in the present but what could it be in the future? Could it be improved by tweaking a few elements? If so, what are these elements? And exact what will be the impact of these changes?

The advantages of forecasting your cash flow are that you can see exactly where you could be in the future and how long it will take to get there. If you are regularly seeing your levels of operating cash flow fluctuate, or fall to worrying levels, you could use a cash flow forecasting tool to help you identify why these problems are occurring and help you evaluate the different options you have to fix them.

For example, if you are struggling at the end of each month to have enough cash to pay wages, you could use the forecasting software to play with different incoming and outgoing figures. This will show you which ones could feasibly be changed to even out the amount of cash within the business across the month.

Operating Cash Flow for Growth

On the other hand, if you are experiencing a surplus of cash within your business on a regular basis, you could be considering investing in growth plans and this is an ideal time to invest in a forecasting tool as it will give you the opportunity to play out different scenarios without the risk of investing in them.

You can forecast the impact on your operating cash flow if you moved premises and took on more staff. You could, risk-free, see how this scenario would impact on your sales levels i.e. how much would you have to increase your sales levels by to cover the additional cost of such a decision. Is this feasible and how would it impact on other elements of your operating cash flow such as additional supplier costs?

Can I Forecast my Operating Cash Flow in a spreadsheet?

Yes, but... as with any spreadsheet, there is the element of human error. And testing spreadsheets is hard - the chance of missing some mistakes is pretty high. If there's a miscalculation in your formulae or add in additional columns or rows without adjusting the formulae to compensate you'll start making decisions based on incorrect figures - without you necessarily being aware of it.

The danger then comes when you base important expansion or investment decisions based on incorrect financial figures leading to disaster further down the line.

Finanscapes have developed an online forecasting tool especially for young businesses, which can be accessed from anywhere with an internet connection. It was developed by people with more than 10 years’ experience in finance. You can publish your forecasts for Bank or Funding Managers to see or just use it to manage your cash flow with peace of mind.

Try it for free now and if you like it it'll only cost you the same as a cup of coffee a month for a full 12 months unlimited use. It makes forecasting so easy you'll never look back...

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