Operating Cash Flow Ratio

Operating Cash Flow Ratio

“Never take your eyes off the cash flow because it’s the life blood of business.” – Richard Branson

What is the operating cash flow ratio?

Measures a business’s ability to pay its current liabilities (due within one year) using cash flows generated by the business’s operations.  

How is the operating cash flow ratio calculated?

Operating cash flow ratio = cash flows from operations / current liabilities.  Operating cash flows comes from the statement of cash flow’s operating section, which includes net income and adjustments to net income and changes in working capital; current liabilities included accounts payable, accrued wages, taxes payable or any other liabilities that are expected to come due within twelve months.  

What does the operating cash flow ratio mean to my business?  

This ratio calculates the number of times a business can pay its short-term obligations with operating cash flows (core business activities).  A business with a ratio that is less than one does not have enough cash flows from operations to pay its current liabilities. A ratio that is great than one does have enough cash flows from operations to pay its current liabilities and have cash left over.

This ratio differs from the current, quick and cash ratios since these amounts represent assets that existed at the balance sheet date and cash flow from operations was generated over a period of time.  

Negatives to the operating cash flow ratio: 
While it is less likely to occur, it is possible to manipulate operating cash flows and thus the operating cash flow ratio.  Furthermore, there could be projects or plans that could hinder this ratio in the short-term and reflecting misleadingly weaker financial position.