Why You Should Monitor
Operating Cash Flow and
How to Do It
A SPECIAL REPORT FROM THE CREATORS OF SMART BUSINESS MONEY HABITS™

Cash flow. What is it?
 Search on the internet for the term
“cash flow” and you’ll find common
agreement with Wikipedia that “Cash
Flow is the movement of money into or
out of a business”. As accurate as this
definition may be, it’s not very helpful
to the entrepreneur wrestling with a
cash flow problem or working to avoid
such problems.
Cash flow. What it’s not.
 Cash flow is not the same as profit. It is
not the same as cash in the bank. It is
not necessarily a good measure of
how well your business is doing. Having
lots of cash flow does not necessarily
mean you have lots of profit or even
any profit. Alternatively, a high level of
profit can be obtained while cash flow
is weak or even non-existent.

Now let’s go
back to that
seemingly
meaningless
definition and
flesh it out a
bit….
“CASH FLOW IS THE
MOVEMENT OF MONEY INTO
OR OUT OF A BUSINESS”

A practical measure of a business’
cash flow is called “Operating
Cash Flow” (OCF)
Also known as “Cash Flow from Operations,” OCF is a basic financial measure
that tells us how well a business is really doing.

“
”
Operating Cash Flow may be the
single most important metric for
measuring the health of your
core business operations.

OCF tells you how much cash you
generate from operating your business.
 It counts only the money coming from
customers.
 It excludes money coming from loans
or from your pocket.
 It deducts only the cash paid to
suppliers and for the general expenses
of operating the business.
 It excludes money going out for loan
repayment as well as money used to
reinvest for growth such as buying
equipment or buildings.
 The result shows whether operating
your business creates cash (positive
cash flow) or consumes cash
(negative cash flow).

IF BASIC OPERATIONS ARE
CONSUMING CASH, THAT IS
A HUGE WARNING SIGN
THAT YOUR BUSINESS IS ON
DANGEROUS GROUND.

OCF is the source
of funds to repay
debt, buy needed
equipment, and
pay dividends or
distributions to
owners.
OCF MUST BE POSITIVE
(CREATING CASH) IF YOUR
BUSINESS IS TO SURVIVE.

How do we calculate OCF?
It may be as simple as printing an OCF statement from your computer
accounting program.
If your program is not set up to print an OCF statement, here is the formula to
manually calculate OCF…

The Formula for Calculating Operating
Cash Flow
 Operating Cash Flow (OCF) = Net Income
plus Depreciation & Amortization
plus decrease or minus increase in Accounts
Receivable
plus decrease or minus increase in Inventory
plus increase or minus decrease in Accounts
Payable
plus loss or minus gain from sale of assets
(It will take less than five minutes to take the numbers from your Income Statement (P&L) and Balance Sheet
and insert them in the formula.)

Here are two real-life examples…
Company A Company B
Net Income 254,000 254,000
plus Depreciation 14,000 14,000
minus A/R increase 15,000 50,000
minus Inventory increase 3,000 20,000
plus A/P increase 12,000 2,000
Operating Cash Flow 262,000 200,000

Company A
is doing well.
They generated
OCF in excess of
Net Income.

Company B
has cause
for concern.
Although their
OCF is positive, it
is much less than
Net Income.
From the increase in Accounts Receivable, it appears they may
be growing too rapidly and consuming their cash.

“
”
Businesses often don’t go broke,
they grow broke.
THIS MEANS THEY GROW FASTER THAN THEIR CASH FLOW CAN SUPPORT
Growing too fast is a common cause of cash flow crises and business failure.

Now that you know your OCF, what
do you do about it?
 As mentioned above, the first test is to see whether your business is creating or
consuming cash.
 If it is creating cash, the next step is to compare OCF with Net Income. Ideally,
OCF is more than Net Income.
 However, a growing business will often have OCF that is less than Net Income.
 This condition cannot exist for long before your business will be out of cash.
 Rapidly growing businesses must generally find sources of cash in addition to
OCF.
 The sources will be either loans, further investment of cash in the business by the
owner, or funds from investors.

But what about
a business that is
consuming
cash?
THAT CONDITION MUST BE
CORRECTED OR SURVIVAL IS
UNLIKELY.

The Cash-Eating Business
 You can begin the analysis process by studying the formula and each
entry you inserted into the formula.
 If you don’t find the source of the problem in that analysis, you must go to
the Income Statement for the answer.
 If solutions are not forthcoming, it is time to seek professional advice. Your
accountant or one of the Smart Business Money Habits Advisors can
provide the help you need.

For businesses in the startup or
early operating stages…
…use Smart Business Money Habits #6: At the end of each
week, project your cash on hand for the next 4 weeks and
#7: Prepare a reliable action plan for dealing with
projected cash shortages to begin the cash flow
projection habit so necessary to business survival and
success.

For businesses in more advanced
operating stages…
…use the more sophisticated and focused Smart Business
Money Habit #21: Implement an advanced system for
tracking and managing your business finances including
more detailed cash flow projections to gain control over
operations and, most importantly, gain control over
growth.

Tools for
implementing
these Habits are
part of the Basic
and Advanced
More Profit
Toolkits™.
FOR MORE DETAILS ABOUT
THE MORE PROFIT TOOLKIT,
GO TO:
www.MoreProfitToolkit.com

How to Put More Profit in Your Pocket
 You can also find additional
information to actively use the Smart
Business Money Habits to increase your
profits in our eBook, How to Put More
Profit in Your Pocket: Practical
Principles for Building a Highly
Profitable, Valuable, and Sustainable
Business.
 Learn more at:
www.SmartBusinessMoneyHabits.com

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”
If you don’t control your cash,
you can’t control your business.
Don’t delay putting our Cash Flow Habits into
practice if you want to create a profitable,
valuable, and sustainable business.

About
Dan Bowser and George Huang are the
founders of Business Money Insights (BMI) and
creators of the Smart Business Money Habits
and the More Profit Toolkit. BMI is an education
and training company dedicated to helping
independent business owners make and keep
more profit from their businesses.
Their mission is to help entrepreneurs become
successful by introducing financial
management and discipline to their businesses.
You can learn more at:
www.SmartBusinessMoneyHabits.com