What is cash flow from operating activities?
Cash flow from operating activities is an essential part of your companys cash flow statement. In addition, understanding cash flow from operating activities can give you some excellent insights into the viability of your core business activities. Find out everything you need to know with our definitive guide. Cash flow from operating activities explained  Cash flow from operating activities (CFO)  also referred to as operating cash flow, free cash flow from operations, or cash flow provided by operations  indicates how much money a business is bringing in from regular business activities. It does not include long-term capital expenditures, revenue from investments, or expenses. Put simply, it is a metric thats solely focused on your core business activities. Cash flow from operating activities formula  The exact formula you use to work out cash flow from operating activities will differ from company to company. This is because every business has different items on their balance sheet/income statement. Having said that, there is a general cash flow from operating activities formula that you can use if youre not sure where to start. Cash Flow from Operating Activities = Net Income + Non-Cash Items + Changes in Working Capital  While you can find the figure for net income on the income statement, youll need to do a little more digging for non-cash items. This includes a wide range of expenses, including depreciation, amortization, depletion, stock-based compensation, and more. After youve added non-cash items to net income, youll need to add in your companys net changes in working capital. Examples of cash flow from operating activities  Lets look at how to use the cash flow from operating activities formula in the real world. Imagine Company A has a net income of $1,500,000 and a net change in working capital of $900,000. Furthermore, Company As depreciation, amortization, depletion, and other non-cash expenses total $400,000. Using these figures, you can work out the total like so:  Cash Flow from Operating Activities = $1,500,000 + $400,000 + $900,000 = $2,800,000  Cash flow from operating activities format: direct and indirect  Its important to understand that there are two main ways to calculate cash flow from operating activities on the cash flow statement: direct and indirect. In the direct method, your operating cash flows are entered as a list of outgoing and ingoing cash flows. However, in the indirect method, operating cash flows are shown as a reconciliation from profit to cash flow. Cash flow from operating activities  direct method: With the direct method, youll record all your transactions and display the information using actual cash inflows/outflows. Cash flow from operating activities  indirect method: With the indirect method, youll need to start with net income and work backward to achieve a figure for cash basis, applying adjustments for amortization and depreciation (i.e. non-cash items). Although many accountants prefer to use the indirect method, as its simpler to prepare, the FASB recommends businesses use the direct method, since it offers a clearer picture of cash flows in and out of your business. Ultimately, the cash flow from operating activities format that you decide to use comes down to personal preference. The cash flow from operating activities formula shows you the success (or not) of your core business activities. If your business has a positive cash flow from operating activities, you may be able to fund growth projects, launch new products, pay dividends, reduce the companys debt, and so on. You should also remember that investors will often specifically look for companies with an upwardly trending cash flow from operating activities. We can help  GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.