What is the Difference between Free Cash Flow and Operating Cash Flow?
Whether you have a small retail store or a multi-billion-dollar company, regularly analyze your cash flow is vital to safeguard your business’ financial health. After all, both are important financial factors that talk about your company’s liquidity position.
But what is the difference between operating cash flow and free cash flow? Well, you have landed in the right place. Keep reading while we’re sharing some of the major differences between these two terms to see how they can affect your business.
Operating Cash Flow
Operating cash flow is the money coming into your company by the regular business activities within a specific time period such as selling goods and services to your customers. Operating activities don’t include expenses, long-term capital expenditures, or revenue drawn from investments.
Operating cash flow is an important financial metric because it tells whether your business has sufficient funds to pay its bills and operating expenses. It is recorded on a company’s cash flow statement, which is reported both on a quarterly and annual basis.
If your business has positive operating cash flow, you won’t run out of cash, can pay your staff on time, can purchase the necessary inventory and equipment, avoid overspending, and grow your business. Operating cash flow doesn’t only indicate whether your business has enough working capital to maintain and expand operations but also when you may need extra cash for capital expansion.
Operating Cash Flow = Net Income + Non-Cash Expenses –Changes in Working Capital
Free Cash Flow
Free cash flow is the amount of cash a company generates from its core business activities, less the cost of expenditure on assets (i.e. long-term fixed assets like real estate, payroll, taxes, and equipment). In other words, free cash flow is the amount of cash left over after you pay for your capital expenditures and operating expenses.
Free cash flow is an important tool as it shows how effectively your company is able to generate cash from normal business activities but also gives investors an idea of how much money your company has to repay creditors, dividend payments, and buyback shares.
If your company has positive free cash flow means you have sufficient working capital to meet your bills every month – and then some.
Free Cash Flow = Operating Cash Flow – Capital Expenditures
You can improve your business’ cash flow using cash flow management and forecasting software. You can view, plan, and solve cash flow gaps in real-time and make smart and informed decisions.
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Reference: https://www.smansha.com/forecasting
