Operating cash flow
Cash generated by the trading that produces net income. Far harder to manage than profit, which is why the two coming apart is worth explaining.
Where you will meet it
Operating cash flow appears in 14 learning outcomes on the CFA syllabus. A few of them:
- Tell accrual accounting apart from cash accounting
“The gap between net income and operating cash flow — accruals — is therefore one of the most informative figures in a set of accounts, and a persistently large positive gap is a recognised warning sign.”
- Use the four Cs framework to analyse credit
“Capacity is the borrower's ability to service debt from operating cash flow, assessed through industry structure, competitive position and leverage and coverage ratios.”
- Explain what to consider about post-employment benefits when modelling and valuing a company
“If the employer contributes more than total pension cost, the excess is economically a repayment of borrowing, so it can be reclassified from operating to financing cash flow, raising operating cash flow.”
- Set out the defining features of buyouts as a private equity strategy
“Returns come from paying down debt with operating cash flow, operational improvements, add-on acquisitions and any rise in the exit multiple.”
Practise it
Practise operating cash flow until it is automatic: questions that explain every wrong option.
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