Looking for ways to optimize business operations? Mastering cash flow from ops (operations) management is key to boosting profitability and ensuring financial stability.
Efficiently managing cash flow is vital for the success of any business. It ensures your core operations run seamlessly and provides insights into your business’s financial health. In this blog, we’ll explore how to calculate cash flow and share practical strategies to manage it effectively, helping you improve operations and drive long-term growth.
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What is Cash Flow From Operations (OCF)?
Cash flow from operations, sometimes known as operating cash flow (OCF) measures all the money going into and out of a company from its core business activities. This could include providing services, selling products, purchasing materials, and paying employees. Because of its limited scope, OCF provides a clearer picture of financial health compared to other metrics like net income which includes investments and other activities outside of regular business operations.
Operating cash flow reflects the actual amount of cash available at any given time. This involves tracking cash generated from daily operations, which can be streamlined using cash management technology like CashSimple® from Integrated Cash Logistics (ICL). Adopting a centralized, automated cash management system is one of the best ways to support cash flow operations.
Examples of Cash Flow From Operations Activities
Operating cash flow activities provide a snapshot of cash moving in and out of a business. There are three main types of operating activities’ cash flow:
- Revenue from Operations: Cash receipts from sales of goods or services
- Operating Expenses: Cash payments to suppliers and employees
- Changes in Working Capital: Receivables, payables, and inventory
Revenue from operations is a positive cash flow while operating expenses represent negative cash flow. Changes in working capital may be positive or negative. Positive cash flow often indicates profit.
Negative cash flow is not necessarily a bad thing in the short term. It could simply show that a business recently invested in new equipment or is owed some pending payments.
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Why Monitoring Cash Flow From Operations Matters
Monitoring operational cash flow is an essential part of any venture. A negative OCF cash flow can indicate a business needs to adjust its growth rate, pricing, or overhead costs to maximize its profit margin. But before you can take any concrete actions, you need to understand what’s going on with your operations cash flow.
Here are some of the benefits of tracking operating activities’ cash flow:
- Improves Liquidity: Tracking flows from operating activities helps the business maintain liquidity so that assets can be quickly and easily converted to cash when needed.
- Allows for Growth: Liquidity allows you to reinvest effectively to grow the business while staying financially stable.
- Increases Trustworthiness: Stakeholders and financial institutions are more likely to want to work with business executives who know where their money is going to and coming from at any given time.
Cash Flow From Ops vs. Net Income
Net income measures overall profits after taxes while cash flow from operations indicates actual cash availability. Cash flow from net income is found on the company’s income statement while cash flow from ops is found on the cash flow statement. Cash flow from operations is better than net income for measuring your company’s liquidity.
On the other hand, net income is the best indicator for determining a company’s profitability over a specific period. However, you need both numbers to track your business’s financial health, and you actually need net income to calculate the OCF.
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How to Calculate Cash Flow from Operating Activities
There are two main methods of calculating operational cash flows—direct and indirect. The direct method records all transactions as they occur while the indirect method starts with net income and works backwards. Most accountants prefer the indirect method as it’s easy to produce using financial documents already on hand, especially if you are using accrual accounting. However, the Financial Accounting Standards Board (FASB) recommends the direct method as it is more comprehensive.
Direct Method
The direct method involves summarizing all cash transactions from operations for a given period, making it straightforward but data-intensive. It’s useful for businesses seeking clarity on cash flow patterns. To calculate net operating cash flow with the direct method, add up all cash inflows such as:
- Money collected from selling goods and services
- Dividends received
- Interest income received
Then, subtract all cash outflows such as money spent on:
- Inventory
- Materials
- Vendors
- Labor costs including salaries, wages, and payroll taxes
Indirect Method
The indirect method is a simple operating cash flow calculation. It starts with net income and adjusts for non-cash items and working capital changes.
Operating cash flow formula:
Net Income + Non-Cash Expenses +/- Changes in operating assets and liabilities = cash flow from ops
You can find your net income at the bottom of your income statement. Start with that number, and add any non-cash expenses related to operations such as asset depreciation. Depreciation doesn’t reduce cash flow, so it needs to be included to get a full picture of your cash flow from operations.
You can find non-cash expenses on your income statement as well. Then, adjust for changes in working capital. For example, if you billed a client but haven’t received payment yet, you need to subtract that amount from net income in the OCF formula.
Direct vs. Indirect Method
The direct method of calculating net cash flow from operating activities is undoubtedly more tedious, but it gives you more detail about your cash flow. This is ideal if you want to identify certain issues with your cash flow management or improve data for cash forecasting. If you want to find operating cash flow quickly but reliably, the indirect method is the way to go.
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Common Business Challenges of Cash Flow From Ops
Many businesses struggle with maintaining consistent cash flow from operations. A negative operating cash flow means your business is losing money. In the short term, this could cause hiccups in daily operations but in the long term, it could indicate bigger issues with sales or marketing strategies.
It’s important to address challenges with operating activities’ cash flow right away to keep the business running smoothly and ensure room for growth. Below are some common cash flow problems companies face.
- Inaccurate Forecasting: Incorrectly predicting future cash flow can lead to unexpected cash shortages and damage your company’s reputation.
- Inefficient Cash Handling Processes: Unnecessarily complex or unorganized business cash management practices often lead to money loss and wasted time.
- Changes in Working Capital: Changes that are not managed effectively can lead to low liquidity.
- Seasonal Fluctuations: Businesses that experience seasonal demands must plan accordingly to stabilize cash flow year-round.
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Strategies to Improve Operating Cash flow
Optimizing cash flow from operations begins with streamlining accounts receivable and payable processes, taking control of your cash management, and exploring ways to leverage automation. By adopting these strategies, organizations can avoid common cash flow from ops challenges, enhance liquidity, improve operational efficiency, and ensure long-term financial stability. Consider how even small adjustments in managing cash inflows and outflows could significantly impact your business’s growth potential.
Invest in Cash Management Solutions
Enhancing your cash flow management can improve cash flow visibility and save you time with efficient, streamlined systems. This can reduce the chances of discrepancies, loss of cash, and other risks associated with cash handling. What exactly does cash management entail? Cash management includes:
- Hardware you use for transactions and securing cash such as cash registers and smart safes
- Software you use to monitor cash flow, generate reports and set up automation
- Processes, procedures, and policies for how cash from operations will be handled
- Hired services for cash pickups, bank deposits, and cash and coin delivery
Integrated Cash Logistics’ cash management technology is an all-in-one solution to all the above cash management needs as well as long-term treasury management. With ICL’s cash capture solution, you can instantly account for cash and ensure it gets deposited into your bank account without leaving your place of business. Simplicity plays a key role in cash management and helps ensure that all your team members and employees can easily learn to adopt new cash management processes.
Optimizing Accounts Receivable and Payable
Balancing receivables and payables with effective cash application stabilizes your operation’s cash flow. Regularly review operation expenses to identify areas for cost-cutting or renegotiating contracts with suppliers. This also improves the quality of data available for cash forecasting which allows you to anticipate the business’s shortfalls or seasonal fluctuations and adjust budgets proactively.
Predicting how much cash flow the company will have in the future requires collecting the right data with the right software. One of the many benefits of CashSimple® is consolidated, flexible reporting so that the data you receive is easy to understand and customized based on your company’s financial goals.
Automating Cash Handling Procedures
Automation reduces the time and effort spent on repetitive tasks, such as cash reconciliation and transport. This reduction allows employees and managers to spend less time off-site and use that time more effectively. Implementing automated invoicing and payment systems ensures timely collections while reducing errors and delays. Automation requires some planning upfront but is a long-term cost-saving solution that when combined with other strategies, can help you generate a consistent positive cash flow from operations.
For more information on our CashSimple® solution, contact us or schedule a demo to see it in action.
Take Control of Your Cash Flow from Operations with Integrated Cash Logistics
Without a comprehensive understanding of your company’s net operating cash flow, the business may struggle and growth may feel impossible. Cash flow from operations is crucial for short-term and long-term financial success and stability. When you are effectively tracking net cash from operating activities, through either the direct or indirect method, you can improve daily operations and cash forecasting for the future.
Transform your cash flow by investing in cash management solutions that work. Integrated Cash Logistics can be your partner in solving operational cash flow challenges. Schedule a demo or explore services like CashSimple® to take control of your cash flow from operations today.
