Cash Flow Statements: Reviewing Cash Flow From Operations

It also indicates if a company can pay debts, reinvest, and give returns. In the UAE, where expense cycles (e.g., payroll via WPS, VAT filing deadlines) are monthly, regular reviews ensure better liquidity planning and help avoid surprises during tax submissions or supplier settlements. From UAE-based startups scaling rapidly to enterprises managing multiple teams and recurring vendor payments, Alaan equips businesses to stay cash-positive, compliant, and in control. Investors, banks, and government funds often assess operating cash flow before approving loans or equity injections. A strong CFO builds confidence that the business can generate cash independently and meet repayment obligations.

Figuring out cash flow from operating activities right shows a company’s financial health and its power to make cash through its main business. This number is crucial not just for the company’s leaders but also for investors looking into the business’s growth and stability future. The direct method calculates OCF by summing all actual cash inflows and deducting operational cash outflows. Although less commonly used, it provides a transparent view of how money flows through the business. The direct method tracks actual cash inflows and outflows from core operations. Though it offers a more detailed view, it’s less common in practice due to the need for transaction-level data.

• Profit is what’s left after all the expenses have been paid — that includes things that would fall under other cash flow categories, like paying loan payments or dividends.
• UAE businesses in hospitality, logistics, healthcare, or real estate rely on it to plan payroll, manage supplier payments, and stay on top of VAT obligations.
• But it’s a crucial indicator of your business’s financial health, one that can be essential if you seek partners or investors.
• It includes the net income the business generated for the given time period and makes a few adjustments to more accurately reflect true income.

A cash flow statement is a financial statement that shows the cash going in and out of a business over a set period. A company’s accounting department keeps track of every transaction that involves cash, such as receiving money when a client pays cash flow from operating activities cfo definition an invoice or sending money out to make payroll or meet a loan payment. CFO is also known as operating cash flow and is the first section presented on a company’s cash flow statement. Here, we have explained in and out of CFO including the examples, format and importance.

Companies typically calculate those types of cash flows separately on their cash flow statement, and then consider them all together to determine whether or not the company is profitable. The details related to the company’s cash flow are available in the respective Cash Flow Statement of the company. This serves to be the part of the quarterly & annual reports of the company.

Is Cash Flow From Operations a better metric than earnings?

Q. How does delayed VAT refund processing affect cash flow in the UAE? Delayed VAT refunds can create temporary cash shortfalls, especially for businesses that frequently make zero-rated or export sales. This means that funds are tied up for a longer period, reducing liquidity. Tracking cash flow from operations helps identify such lags early and plan reserves accordingly. For UAE businesses, especially those navigating rapid expansion or sector-specific challenges, cash flow from operating activities is a decision-making tool. It helps leaders plan growth, secure funding, avoid regulatory issues, and operate with greater confidence.

• If a company brought in more cash than it paid out, it had positive cash flow over the period.
• Understanding these differences helps businesses benchmark cash efficiency within their sector.
• Inventories, tax assets, accounts receivable, and accrued revenue are common items of assets for which a change in value will be reflected in cash flow from operating activities.
• For investors, it’s important to understand the difference between cash flow from operating activities and profit.
• Because a company’s income statement is prepared on an accrual basis, revenue is only recognized when it is earned and not when it is received.
• Then, adjustments to net income in calculating operating cash flows include items like non-cash expenses and changes in working capital.

Ramp can help companies control spend and manage cash flow

Looking at these three elements gives us a full view of a company’s operating cash. It’s vital for those who want to check on the business’s financial health and performance. With a good grasp on operating revenues, expenses, and working capital changes, financial experts can make plans. The direct method looks at actual money movements to find cash flow from operations.

Why Is Cash Flow From Operations More Important Than Profits?

While earnings provide useful information, they can be influenced by accounting techniques. This method reflects how much actual cash was earned from operations, as opposed to net income, which includes non-cash items like depreciation and amortization. The cash flow from operating activities section can be displayed on the cash flow statement in one of two ways. Investors attempt to look for companies whose share prices are lower and whose cash flow from operations is showing an upward trend over recent quarters. The disparity indicates that the company has increasing levels of cash flow, which, if better utilized, can lead to higher share prices in the near future.

A company may report $2 million in net income but only $1.2 million in OCF due to unpaid invoices or increased inventory. In this article, you’ll get to know what operating cash flow is, how to calculate it using the direct and indirect methods, and how to avoid common reporting mistakes. We’ll also look at Excel workflows, ERP software, and industry-specific examples to help you improve accuracy and decision-making. However, we must be careful with Financing Activities to avoid too much debt. The way to prepare cash flow statements shows if a company can adapt financially.

Why is CFO considered more reliable than net income?

The direct method offers high clarity since it shows the exact sources and uses of cash. However, it requires detailed cash tracking and is rarely used in practice due to the time involved. A company with $100,000 in annual loan payments and only $80,000 in OCF may face risk, while one with $300,000 in OCF has room to invest and distribute dividends. Businesses often avoid the direct method unless mandated, as it increases reporting effort without impacting the final CFO amount. Efficient inflows improve short-term liquidity and reduce dependency on external funding sources.

This method is preferred due to its simplicity and alignment with financial statements prepared under the accrual accounting method. The income part of the flow from the main activity is only the amount of funds from the proceeds for manufactured products (sales). A negative CFO suggests that the company is spending more cash on its operations than it is generating. This could be due to operational inefficiencies or temporary business conditions but is often a sign of financial distress if it persists over time. Since EBITDA excludes interest and taxes, it can be very different from operating cash flow. Additionally, the impact of changes in working capital and other non-cash expenses can make it even more different.

Ensuring sufficient cash to meet debt obligations reduces default risk, while positive cash flow supports business reinvestment and growth. A popular way to perform sensitivity analysis is to create best and worst-case scenarios based on your base level cash flow forecast. For example, a best-case scenario could be that your business’s expansion into a new market leads to a 20% increase in sales. For instance, you can compare your operating cash flow margin across quarterly or annual periods to see how your cash management and operational efficiency is trending.

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Comparing your cash flow statements and ratios across multiple periods can provide insight into trends over time. Working capital assesses your business’ ability to manage short-term financial obligations and operational efficiency. It represents the difference between your current assets and current liabilities, indicating the amount of capital available to fund daily operations.

CFO helps ensure there is enough cash available to remit VAT on eligible transactions, especially for firms with high monthly volumes. Kit is the Content Marketing Manager for The Access Group APAC and Fathom. He is a former journalist with extensive experience in content writing and copywriting across various industries, including higher education, not-for-profit, and finance sectors.

It measures how much money (notionally referred to as ‘cash’ here) has entered the firm’s corpus and how much has exited. As long as you have a reliable balance sheet with detailed line items, the indirect method is easier to use than the direct method, since it doesn’t require tracking down receipts and invoices. As you can see in the above example, there is a lot of detail required to model the operating activities section, and many of those line items require their own supporting schedules in a financial model. There can be additional non-cash items and additional changes in current assets or current liabilities that are not listed above.