Operating Cash Flow (FCO)
The cash flow operating (FCO) is the amount of money in cash that generates a company through its operations and the exercise of their activity. This flow allows to value and quantify the inflows and outflows of money through the exploitation activities, being difficult to manipulate.
This term can be associated with accounting profit, however, it is not the same. The calculation of operating cash flow does not include financing costs. In turn, the latter includes depreciation at the end of its calculation, unlike accounting profit, where it is not included. For example, within the category of operating cash flow, we can include sales revenue, personnel expenses or suppliers.
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Operating Cash Receipts
The following are considered operating cash receipts:
- Income from funds for the sale of goods and services, including collections and receivables in payment of such sales.
- Interest charged on loans granted to other entities and dividends received by the capital investments of other companies.
- Revenue from extrajudicial matters and compensation received by insurers.
Operating Cash Expenses
The following are deliberated operational capital outflows:
- Payments for the purchase of materials for the manufacture of goods or the purchase of goods for resale.
- Payments to employees and suppliers of goods and services.
- Payments to the government of taxes, fines, fees, fees and penalties.
- Interest paid to lenders.
- Payments for extrajudicial matters, donations to non-profit organizations and client reimbursements.
Method of Calculation
The operating cash flow is calculated as follows:
EBIT (Earnings before taxes and interest) + amortization – taxes.
The EBIT, can be found in the profit and loss from any company or income statement and in their annual reports.
Example of Operating Cash Flow
Below I mention example with calculation
Operating Cash Flow Calculation
Suppose we extract the following financial data from a company X in the year 2016:
EBIT = $ 16,000
Amortization = $ 2,500
Taxes = $ 2,000
Therefore, through its calculation formula we will have:
EBIT (Profit before taxes and interest) + amortization – taxes = 16,000 + 2,500 – 2,000 = 16,500 $
We can conclude that the operating cash flow in 2016 is $ 16,500.
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