What is operating cashflow?

trees and sunlight banner

Understanding your operating cashflow is a vital part of managing your day-to-day finances and maintaining the longer-term financial health of your business.

82% of failed US small business cite poor cashflow as the key reason for their failure, according to research by the U.S. Bank. That sobering statistic shows the importance of having real control over your operating cash – the better you understand your everyday cashflow, the more financially stable your business will be.  

But what exactly is operating cashflow and how does it differ from other ways of measuring your cash position?

What is operating cashflow?

Operating cashflow tells you about the cash you’ve created as a business through your usual day-to-day trading, and the costs associated with your general operating activities.

Operating cashflow is a key element of your cashflow statement. The overall cash for the business is broken down into three key areas – operating cashflow, investment cashflow and financing cashflow – with operating cash being a central focus for your finance team.

Your operating activities will be either:

  • Operating cash inflows – the total operating income that you’ve generated through selling your products or services.
  • Operating cash outflows – the operating expenses you’ve incurred in order to make a product, sell a product or deliver a service to your customers.

So how do you go about calculating this overview of operating cashflow?

Direct or indirect operating cashflow?

The Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) both suggest calculating operating cashflow with the ‘direct cashflow’ method.

Using the direct approach, your operating cashflow number is found by taking your total revenue for the period in question – this can be weekly, monthly or quarterly – and then subtracting the total cost of expenses, overheads and other operating deductions.

The direct accounting formula for operating cashflow looks like this:

Operating cashflow = Total income – Operating expenses

The end calculation is based on operating cash inflows and outflows recorded in your accounting actuals, so it’s highly accurate in the short and medium term. But to manually forecast cashflow in the longer-term, you need to apply some key assumptions in order to generate an accurate cashflow projection of your operating cash.

In instances where you don’t have access to the detailed actuals needed for the direct cashflow method, it’s possible to create a manual calculation using the ‘indirect cashflow’ approach.

The indirect cashflow formula looks like this:

Operating cashflow = Net revenue +/- Changes in Assets and Liabilities + Non-cash expenses

This formula may appear more complicated at first glance, but the key reason for adopting the indirect cashflow model is that the financial figures you need (revenue, assets and liabilities) will all be readily available in the balance sheet of your company accounts – so it’s traditionally been the quickest manual method of calculating your operating cashflow.

Why is operating cashflow important?

In essence, your operating cash position is a great indicator of how well you’re creating revenues as a business, and how well you’re managing the cost savings, expenses and overheads you experience while bringing your products/services to market.

As such, using the direct method can provide more information and deliver greater insight into how well your business and financial models are functioning.

That’s important for a number of reasons:

  • Better insight into everyday financial efficiency – a detailed view of operating cashflow helps you understand your income and costs in the most granular way
  • Clearer view of future cashflow – running cashflow forecasts based on your genuine actuals helps to highlight the future cash dips and use your working capital effectively
  • Cost management is made easier – by drilling down into your expenses, you can quickly highlight areas that are ripe for costs savings.
  • The business is more attractive to investors – with such a clear analysis of your cashflow, you can bring investors and lenders the assurance they need around the medium and longer-term prospects of the company.

Using tech to improve operating cashflow

Making use of the direct method to monitor your operating cashflow has many key advantages, but you are reliant on having access to detailed actuals and historical financial information to be able to reach a calculation for that all-important cashflow number.

So how do you make the process easier?

The answer is to move to a smart cloud-based cashflow solution, like Fluidly, and to let the software do some of that heavy lifting for you.

Fluidly uses the direct method for calculating your operating cashflow, providing you with a clear dashboard that shows you all operating incomes and expenses. And because Fluidly integrates seamlessly with your online accounting software, you get all of these cashflow numbers as real-time information – providing the most accurate statements and forecasts of your cash position over your choice of future periods.

Get in control of operating cashflow

If you want an accurate, real-time overview of your organisation’s operating cashflow, move over to Fluidly’s smart cashflow engine and get detailed control over every aspect of your cash inflows and outflows.

Let Fluidly keep an eye on your cash