What is operating cash flow?
Operating cash flow is the amount of cash generated by a company's main business activities. It is an important measure of a company's financial health, as it indicates whether the company is generating enough cash from its business operations to pay its bills and invest in growth.
How to calculate operating cash flow?
To calculate operating cash flow, subtract ‘operating expenses’ (such as payroll, marketing investment, rent, etc.) from the ‘total revenue’ (from product/subscription sales, upsells, etc.)
Formula for calculating operating cash flow
Real-life example of operating cash flow
Let’s look at an example to understand operating cash flow:
Say, you run an eCommerce company. Assume, your revenue in the first quarter of the year was $100,000 and operating expenses were $15,000 in the same period.
Then, your operating cash flow will be: 100,000 - 15,000 = $85,000
What’s considered a good operating cash flow? (benchmark)
A good operating cash flow is one that is positive and sufficient to meet the company's financial obligations and support its ongoing operations. An operating cash flow ratio over 1 is considered to be desirable, while a ratio lower than that indicates the strained financial standing of the firm.
Positive operating cash flow indicates that a company has sufficient cash on hand to meet its short-term obligations and pursue long-term goals, while a negative operating cash flow may indicate that the company is struggling to generate enough cash to cover its expenses.
Ways to increase your operating cash flow
- Modernize legacy software: Consider leveraging legacy modernization services. Investing in legacy modernization services can significantly impact operating cash flow. By updating outdated systems and technologies, companies can streamline operations, reduce maintenance costs, and improve overall efficiency. This not only frees up cash flow previously allocated to maintaining legacy systems but also positions the company for future growth and innovation.
- Offer flexible payment options: Offering flexible payment options, such as allowing customers to pay in installments or offering discounts for early payment, can help improve cash flow by reducing the amount of time it takes for customers to pay.
- Negotiate payment terms with clients: Negotiating payment terms with clients, such as requiring a deposit upfront or setting a shorter payment timeline, can help improve cash flow by ensuring that the company receives payment more quickly. Read: Ways To Ensure You Get Paid by Customers and Clients
- Diversify services and revenue streams: Diversifying services and revenue streams can help improve cash flow by reducing the company's reliance on any one source of income. This can be achieved by offering a wider range of services or by exploring new revenue streams, such as consulting.