Day-to-Day Needs

Operating cash flow refers to the daily cash inflows and outflows generated from business revenues earned, excluding certain costs.

Learning Objective

Define operating cash flow

Key Points

The International Financial Reporting Standards (IFRS) defines operating cash flow as cash generated from operations less taxation and interest paid, investment income received and less dividends paid.
"Cash and cash equivalents" on the balance sheet are the most liquid assets found on this statement. They are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper.
Cash flow forecasting or cash flow management is a key aspect of the financial management of a business, because planning for future cash requirements can help to avoid a liquidity crisis in the business.

Terms

liquidity
An asset's ability to become solvent without affecting its value; the degree to which it can be easily converted into cash.
International Financial Reporting Standards
International accounting standards that provide a common global language for business affairs, so that company accounts are understandable and comparable across international boundaries.

Full Text

Operating Cash Needs

Operating cash flow refers to the amount of cash a company generates from the revenues it brings in, excluding costs associated with long-term investment on capital items or investment in securities. The International Financial Reporting Standards (IFRS) defines operating cash flow as cash generated from operations less taxation and interest paid, investment income received and less dividends paid. Business operations have daily cash inflows and outflows. Cash inflows come from cash sales of inventory, collection of credit sales, sales of other assets, and funds obtained through credit financing. Cash outflows occur due to cash payment of business expenses, purchase of assets, and payment on debt .

Liquidity

Liquidity is essential for businesses, because it allows them to meet daily operating needs.

Cash and Cash Equivalents

"Cash and cash equivalents" on the balance sheet are the most liquid assets found on this statement. They are assets that are readily convertible into cash, such as money market holdings, short-term government bonds or Treasury bills, marketable securities, and commercial paper. Cash equivalents are distinguished from other investments through their short-term existence; they mature within three months and have insignificant risk of change in value.

Cash and cash equivalents are also used in the contexts of payments and payment transactions and refer to currency, money orders, paper checks, and stored value products, such as gift certificates and gift cards.

Operating Cash Forecast

Cash flow forecasting or cash flow management is a key aspect of the financial management of a business, because planning for future cash requirements can help to avoid a liquidity crisis in the business. Cash flow is the life-blood of all businesses, particularly start-ups and small enterprises. As a result, it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive.

[ edit ]

Prev Concept

Financial Plan and Forecast

Capital Expenditures

Next Concept