Operating Cash Flow Ratio

Operating Cash Flow Ratio

Operating Cash Flow Ratio

The operating cash flow ratio is a measure of your business’ performance over a period of time (usually the previous 12 months), and uses information from your business’ statement of cash flows to measure liquidity.

Operating Cash Flow Ratio Formula:

Operating cash flow ratio = Operating cash flow / Current obligations

Helpful Definitions:

Operating cash flow: The operating cash flow or OCF is found in the first section of your business’ statement of cash flows. It is a number measuring the amount of cash your company is making through normal business operations over a set period of time (usually one year).

Current obligations: Also called current liabilities, these are a company’s short-term financial obligations, due within one calendar year. Current liabilities can include accounts payable, short-term debt, dividends, and taxes owed, among other financial obligations.

What can the operating cash flow ratio tell me about my business?

When calculated, the operating cash flow ratio will provide you with a number somewhere above or below one. If it is above one, that means your cash flow over the past year was adequate to pay all current liabilities. If it is below one, that means your current liabilities exceeded your OCF over the past year.

The operating cash flow ratio works on the assumption that current obligations will be paid for by the cash flow from everyday business operations, and not the assets available to the company. This separates it from the current ratio, quick ratio, and cash ratio. 

These previous three ratios also look at a business’ finances as a snapshot, while the operating cash flow ratio takes into account the cash flowing in and out of a company over a set period of time. This means the operating cash flow ratio is considered a more accurate overall ratio, because it acts as an average financial picture, rather than representing liquidity on one particular date in a company’s business cycle. It is also less easily manipulated.

Because of this, investors and lenders will often look at the operating cash flow ratio in order to get an accurate evaluation of a business’ financial health.

Cash flow can be affected by investments, projects, or growth strategies that temporarily inhibit the amount of money you’re taking in. Stay aware of your cash flow to understand how this particular ratio may be affected.

Comparing your operating cash flow ratio to the ratio of companies of a similar size within your industry can give you a sense of whether or not you are within the average.

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