Cash Flow From Operating Activities: How It Works

You might have encountered cash flow from operating activities on your business cash flow statement. We’re breaking down the calculation so you can see what factors play the biggest role.

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What is Cash Flow from Operating Activities?

According to Investopedia, cash flow from operating activities (CFO) is an accounting item that indicates the amount of money a company brings in from ongoing, regular business activities, such as manufacturing and selling goods or providing a service.

This calculation, also known as operating cash flow (OCF), makes up one of three sections of a company’s cash flow statement. Its purpose is to show how much capital the business can generate simply from day-to-day operations, rather than through fundraising, borrowing, or other external financing.

Breakdown

Here’s the formula used to calculate your business’s OCF:

OCF = Net income + Depreciation/Amortization + Changes in Working Capital

With that in mind, let’s break each key element down.

Net Income
The net income, or revenue, is usually taken directly from the top line of your company’s income statement. All the sales coming in are used as a baseline to which adjustments are made in order to determine cash flow.

Depreciation and Amortization
The next step is to incorporate depreciation and amortization. These are tangible assets like large equipment and intangible assets like licenses that are listed as expenses on your income statement, but are actually added back into your revenue since they’re not cash-based.

 

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Changes in Working Capital

The final step of the equation is to incorporate differences in working capital over time. If assets outweigh liabilities, you’ll see a positive number. Otherwise, it’ll be subtracted from your overall cash flow. For example, if you see an increase in accounts receivable, the capital owed to you by your customers, this will have a negative impact on your cash flow. On the other hand, an increase in accounts payable (the money your company owes) means that you have more available cash and therefore a higher OCF.

Why It Matters

Lenders want to know how much cash your company has on hand to grow and accommodate a loan. Cash flow statements allow you to get an understanding of not only your net income, but how it figures in your available revenue on a regular basis.

Understanding the components that make up your business cash flow can help you strengthen your bottom line, lower expenses, and increase efficiency. With strong cash flow, you may also be eligible for low-cost financing like an SBA loan. Known as the gold standard in small business lending, SBA loans have low rates, long terms, and no prepayment penalty. SmartBiz Loans will be your advocate and help you get to a “Yes” with a streamlined application process. See how we’ve helped small business borrowers like you by visiting our TrustPilot profile.

Learn where you stand in terms of being Loan Ready by signing up for SmartBiz Advisor today. You’ll get personalized recommendations based on your financial situation that can help you build a strong lending profile and increase your chances of loan approval, free of charge.

 

* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

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