Operating Cash Flow vs. Free Cash Flow (2024)

FAQs

Operating Cash Flow vs. Free Cash Flow? ›

Key Takeaways. Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.

Operating profit includes depreciation and amortization, but excludes interest and taxes. Cash flow from operations does the opposite: it excludes depreciation and amortization because they are non-cash expenses, and it includes interest and taxes because they are cash expenses.

Operating cash flow margin uses operating cash flow and not operating income. Free cash flow margin is another cash margin measure, where it also adds in capital expenditures.

Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.

The FFO represents the operating performance and takes net income, depreciation, amortization, and losses on property sales into account while factoring out any interest income and gains from property sales. The cash flow from operations, on the other hand, is reported on the cash flow statement.

Cash flow includes total revenues that flow into your business while operating cash flow is obtained from direct business operations; excluding outside revenue sources in its calculation.

Free cash flow, or FCF, is the money that is left over after a business pays its operating expenses (OpEx), such as mortgage or rent, payroll, property taxes and inventory costs — and capital expenditures (CapEx). Examples of CapEx are long-term investments such as equipment, technology and real estate.

Free Cash Flow = Cash from Operations – CapEx

It shows the cash that a company can produce after deducting the purchase of assets such as property, equipment, and other major investments from its operating cash flow.

Free cash flow, or FCF, is the money that is left over after a business pays its operating expenses (OpEx), such as mortgage or rent, payroll, property taxes and inventory costs — and capital expenditures (CapEx).

What is another name for operating cash flow? ›

It is the first section depicted on a company's cash flow statement. Cash flow from operating activities does not include long-term capital expenditures or investment revenue and expense. CFO focuses only on the core business, and is also known as operating cash flow (OCF) or net cash from operating activities.

There are three cash flow types that companies should track and analyze to determine the liquidity and solvency of the business: cash flow from operating activities, cash flow from investing activities and cash flow from financing activities. All three are included on a company's cash flow statement.

Operating cash flow is equal to revenues minus costs, excluding depreciation and interest. Depreciation expense is excluded because it does not represent an actual cash flow; interest expense is excluded because it represents a financing expense.

FCF allows investors to assess whether a company has excess cash available for these purposes, whereas EBITDA does not provide this insight. FCF is often considered a more conservative and resilient measure of a company's financial health. It accounts for the sustainability of a company's cash generation over time.

Free cash flow can be higher or lower than EBITDA. In each case, it depends on the circ*mstances in the company, which expenditures were made. If the changes in working capital within a financial year are strongly positive because e.g. a large investment was made, the free cash flow can be less than EBITDA.

The FCF margin formula subtracts the capital expenditure (Capex) of a company from its operating cash flow (OCF), and then divides that figure by revenue. The free cash flow metric we use here is the simplest variation, wherein a company's capital expenditures are subtracted from its operating cash flow (OCF).

profits: Indication: Cash flow shows how much money moves in and out of your business, while profit illustrates how much money is left over after you've paid all your expenses. Statement: Cash flow is reported on the cash flow statement, and profits can be found in the income statement.

But you should also consider evaluating “good” free cash flow in terms of Bessemer's efficiency score — the sum of your growth percentage and free cash flow margin percentage. Like the rule of 40, anything above 40 in this calculation is considered “good” and bodes well for the valuation of your SaaS company.

Well, while there's no one-size-fits-all ratio that your business should be aiming for – mainly because there are significant variations between industries – a higher cash flow margin is usually better. A cash flow margin ratio of 60% is very good, indicating that Company A has a high level of profitability.