Adequate cash-flow is significant to running a healthy business and anybody running their own business will know it. It is a taboo that healthy cash flows in any business come from equity funding or income from other investments and not their original business operations. The OCF or Operating Cash Flow unfolds what revenue is generated by ongoing business operations like sale of goods or services.
Importance Of Tracking Cash Flow
There are quite a lot of advantages tracking your cash flow. Tracking cash flow helps in:
- Improving your current performance
- Enabling your investors to know of your status and in positive case bring in more investment
- Foreseeing your long-term business value based on the current cash flow metrics
- Enabling potential buyers to judge your business, if you are looking to sell your business
- Enabling you to know the cash at hand to make any short-term finances, if need be
- Enabling you to manage your cash flow better
How Can You Track The Cash Flow Metrics
Tracking your cash flow metrics is fairly simple. There are two ways to do it:
1. Direct method
Direct method to finding OCF basically involves finding the Earnings Before Interest and Taxes or EBIT. Next, you need to find the depreciation or the declining value of the company’s assets due to wear and tear.
Now, OCF= EBIT + Depreciation – Taxes.
2. Indirect method
If you use the indirect method to calculate your cash flow, you must ensure that you abide by the GAAP or Generally Accepted Accounting Principles, established US Accounting standards. That said indirect method is the most preferred method by most business men. This is because of the fact that it provides reconciliations from net income to the cash rendered by operations.
Steps to finding OCF:
- Find your net income
- Add the non-cash expenses back in – like amortization & depreciation
- Adjust the profits and losses on the sales of assets
- Subtract the profits
- Add the losses back in
- Account the variations in current assets and liabilities
- Account the variations in non-cash current assets
Generally, business with positive OCF means that the business has net incomes that are reliable and can stand the test of time like any economic downturns or undesired situations. Negative OCF means the business has to work strategically to cover the shortfalls and get back on track to withstand any seasonal business shortages and also thrive in the long run.
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