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Operating Cash Flow: A Key Indicator of Financial Health

Unlike other performance metrics that indicate how well a company is doing, operating cash flow reveals how much gas is left in the tank. It’s one of the oldest and simplest metrics companies track, and over time it’s proven itself to be one of the most important metrics, too. Formally or informally, every business tracks its operating cash flow even if it tracks nothing else.

The Meaning of the Metric

Basic as operating cash flow may be, it says a lot about a company’s financial health. Whether calculated directly or indirectly, it indicates how successful a company is at its core business activities, from manufacturing goods to providing services. This metric appears first on a cash flow statement for the simple reason that people need to see it before other metrics.

Since it indicates the amount of short-term cash a business has on hand, operating cash flow guides companies through their most immediate and important decisions. Basing these decisions on accounting earnings alone is potentially risky because those figures could be affected by depreciation or amortization in ways that make a company’s financial position look stronger than it really is.

Closely tracking operating cash flow tells a company whether it can cover its operating expenses or leverage enough capital to spur future growth. Beyond that, this metric tells a company whether it can meet its interest payments and debt obligations, or pay out a dividend to shareholders. Given all that’s implied by this one metric, investors and other outside observers watch a company’s operating cash flow carefully. The question is whether anyone tracks it closely enough.

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Finding the Signal in the Noise

Most companies are skilled at calculating operating cash flow after doing it repeatedly as part of the Generally Accepted Accounting Principles (GAAP). Determining this figure, either directly or indirectly, is relatively easy to do as needed. The challenge is that in today’s fast-moving economy, companies need to do it constantly.

Operating cash flow is just one of at least a dozen (and arguably many more) metrics and financial ratios that today’s C-suite decision-makers need to be tracking at all times. Doing so, however, creates huge hurdles in terms of volume and velocity.

Volume is an issue because tracking multiple metrics at once means constantly pulling data out of an ERP, plugging it into the requisite Excel spreadsheets, and cleaning up the calculations as necessary. Manually moving around data is slow and error-prone in a way that’s unsustainable for financial reporting.

Velocity is an issue because executives need to know where operating cash flow stands right now, not last week, month, or quarter. Basing decisions on outdated and potentially inaccurate data makes those decisions uncertain, which is why executives ideally need access to real-time insights about operating cash flow and other key performance indicators.

The dilemma facing today’s executives is how to make working with enterprise data efficient enough to positively impact the decision-making process. Accomplishing that feat requires a few things: cutting out the involvement of the IT team, accelerating existing workflows, eliminating human errors, and getting better at distributing reports. Unfortunately, each one of those is a major undertaking, and when it’s possible to improve reporting, it happens slowly and systematically.

Instead of trying to fix a defective process, consider relying on something else entirely. Executive dashboards from insightsoftware provide a direct look at the latest data, backed up by drill-down capabilities, sophisticated visualizations, and automatic updating. Like the dashboard of a car, it focuses attention where it matters most. See how it works with operating cash flow specifically by downloading our free Operating Cash Flow Performance Dashboard today.

Operating Cash Flow