Operating Cash Flow

Post date: May 4, 2014 11:03:05 AM

In the context of projects operating cash flow plays an important role when budgeting, monitoring and controlling costs throughout the whole project life cycle. Presence of sufficient cash flow assures the capability of long running projects to keep on going.

The basis to compute operating cash flow is the Income Statement of a company which lists all revenues and expenses which took place for a certain period of time, usually one year but reports are available on a quarterly basis, too.

Net income is an important component helping us to compute the operating cash flow. It represents the difference between revenue registered and the expenses that took place in a certain timeframe and can be summarized in the following equation:

net income = revenues - expenses

The Income Statement contains all the information needed to find out the total amount of revenue and expenses. Revenue is considered the sum of all different categories of income. Expenses represented by the following categories: cost of goods sold, selling, general and administrative expenses, other expense categories, depreciation, interest expense and income taxes.

operating cash flow = net income + depreciation + interest expense

As we see in the above formula, interest expense is seen rather as a part of financing decisions of a company and not as an operating one. Since operating cash flow represents the funds that the company generates from its normal business operations, depreciation is also not a part of it. While interest expense is quite clear to quantify, there are different means to assess and compute depreciation, more about this comes within the next article...