Cash Flow from Operating Activities or OCF = Net Income or PAT + Non-Cash Expenses + Changes in Working Capital.
The non-cash expenses are the depreciation or amortisation expenses acquired by the firm. Generally a cash flow statement is divided into three sub-statements which are Cash Flow from Operations, Cash Flow from Investing Activities and Cash Flow from Financing Activities. The operating cash flow shows the abilities of companies in generating returns from its core activities rather than acquiring or selling assets or investing in financial instruments. The reason OCF is important as more returns generated through core activities would help companies expand, innovate new products, buyback stock from market or reduce debt. Investors look into improving cash flow from operations and low share prices as indicators of a value stock.
Hence some companies try to influence their cash flow from operations through changes in working capital. They extend the time to pay their bills that is accounts payables thus preserving their cash, shortening the time in collection of their receivables or putting off buying inventory. It is however important to note that a negative OCF is not necessarily bad for a company if there is a legitimate reason such as company is introducing a new product and hence is a net spender of cash.
OCF is accounted for on the cash flow statement of an organization's quarterly and yearly reports. OCF likewise incorporates changes in working capital (current resources less present liabilities, for example, increases or decreases in inventory, short-term debt, accounts receivable and accounts payable. Income that an organization gets from investment exercises is accounted for independently, since it is not from business operations. Contrasting OCF and EBITDA can give bits of knowledge into how an organization funds working capital. Likewise, speculators will analyse an organization's OCF independently from the other two segments of income – investment and financing exercises - to decide from where an organization is truly getting its cash. Financial specialists need to see positive cash flow in light of positive income from repeating operating activities. Positive income that outcomes from the organization auctioning off every one of its assets, or on the grounds that it has as of late issued new stocks or bonds, results in one-time picks up and is not a marker of money related wellbeing. Financial specialists will likewise analyze the organization's accounting report and wage proclamation to get a more full picture of organization execution. Essentially, OCF avoids dividends paid to stockholders and cash spent to buy long haul capital, for example, equipment and facilities, in light of the fact that these are additionally one-time or occasional costs.
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