{"id":2677,"date":"2021-08-26T16:52:45","date_gmt":"2021-08-26T21:52:45","guid":{"rendered":"https:\/\/www.northone.com\/blog\/?p=2677"},"modified":"2023-05-16T11:54:58","modified_gmt":"2023-05-16T16:54:58","slug":"operating-cash-flow-ratio","status":"publish","type":"post","link":"https:\/\/www.northone.com\/blog\/accounting\/operating-cash-flow-ratio","title":{"rendered":"Operating Cash Flow Ratio: Definition & Formula"},"content":{"rendered":"\n

For any business, the operating cash flow ratio is an important measure of profitability. For small business owners, it is essential. But with so much of your time spent running and growing your business, it can be challenging to manage the cash flow of your business<\/a> and keep track of just how well your company is doing.<\/p>\n\n\n\n

The operating cash flow ratio provides a clear financial assessment of your company\u2019s needs and can help you plan for the health of your business.  <\/p>\n\n\n\n

<\/span>What is the Operating Cash Flow Ratio? <\/span><\/h2>\n\n\n\n

The operating cash flow (OCF) ratio<\/a> is the measure of money earned and spent by your business. This is a simple enough idea\u2014with powerful results. The OCF ratio lets you know if you are prepared to cover your expenses and how much cash you have on hand for any short-term needs.<\/p>\n\n\n\n

It might seem that a smaller business wouldn\u2019t need to use ratios and formulas. But in fact, cash flow is often an issue for entrepreneurs<\/a>. If you have a firm grasp on your operating cash flow ratio and know how your cash ebbs and flows, you\u2019ll be less likely to be surprised by a shortage in revenue. <\/p>\n\n\n\n

The higher your OCF ratio, the healthier your company. You\u2019ll be able to cover upcoming bills and still have earnings left over.<\/p>\n\n\n\n

<\/span>The Formula to Calculate the Operating Cash Flow Ratio<\/span><\/h2>\n\n\n\n

The formula for your operating cash flow ratio is a simple one:<\/p>\n\n\n\n

Cash Flow from Operations (CFO) divided by Current Liabilities (CL) or:<\/strong><\/p>\n\n\n\n

CFO \/ CL = OCF Ratio<\/strong><\/p>\n\n\n\n

Start by calculating your incoming cash\u2014your CFO. The key here is to focus on your company’s regular business operations. You want this number to be as realistic and consistent as possible. What is your business bringing in each month? Each day? There is no more critical number to your business than that consistent inflow of cash.<\/p>\n\n\n\n

There are many different formulas that accountants and investors use to assess a company. But for a small business owner, it’s essential to have a firm grasp of the day-to-day.<\/p>\n\n\n\n

Cash flow from operations<\/strong> is your total revenue<\/strong> from normal<\/strong> operations (do not include investments, for example). Next, tally up all of the business’s operating expenses <\/strong>for the same time period. <\/p>\n\n\n\n

Total Revenue – Operating Expenses = Cash Flow from Operations<\/p>\n\n\n\n

Think of CFO as net income. Take your generated revenues\u2014and deduct the cost of the goods you sold plus the operating expenses associated with those sales.<\/p>\n\n\n\n

Next up: current liabilities<\/strong>. Current liabilities are one that you\u2019ll need to pay within a one-year time frame<\/a>.<\/p>\n\n\n\n

Now we can find our Operational Cash Flow Ratio!<\/p>\n\n\n\n

When you divide the cash flow from operations by your current liabilities, you’re looking for an Operational Cash Flow Ratio of more than 1. Anything higher and you may have some extra cash\u2014lower, and it can mean your business is faltering.<\/p>\n\n\n\n

<\/div>\n\n\n\n

<\/span>Example of Operating Cash Flow Ratio<\/span><\/h2>\n\n\n\n

Here\u2019s an example of a healthy operating cash flow ratio from Intel Corporation<\/a>:<\/p>\n\n\n\n

\"\"\/<\/figure>\n\n\n\n

You can track your own OCF ratio with different tools and analytics\u2014but why track it all?<\/p>\n\n\n\n

<\/div>\n\n\n\n

<\/span>What are the Advantages of Operating Cash Flow Ratio Analysis<\/span><\/h2>\n\n\n\n

Analyzing your cash flow ratio can bring a lot of insight into your business. For example:<\/p>\n\n\n\n