What is cash flow from operations?

Definition

Cash flow from operations is the cash the shop generated or used by running the day-to-day business. On the books, this is the top block on the Statement of Cash Flows, sitting above investing and financing.

A bike shop reads it as cash from selling bikes and parts, minus cash that went to vendors, payroll, and the other keep-the-doors-open bills. It is not the same number as the leftover at the bottom of the Income Statement.

It is a section total, not a ledger account you debit. The statement computes it each period from profit and from the working-capital accounts that moved.

Accrual profit can sit ahead of cash when customers have not paid. This block is where that gap is explained.

Where it shows up

Cash flow: Located at the top of the Statement of Cash Flows, before investing and financing.

P&L: Related to net income, which is not the same number.

Balance Sheet: Related to working-capital accounts that explain the gap.

See also: Statement Of Cash Flows · Net Income · Changes In Working Capital

When you look at your Statement of Cash Flows, this block is the first one. Buying a workstand or drawing on a loan sit further down, in the later blocks.

When the figure is high, the shop's day-to-day work brought in more cash than it used. When it is low or negative, collections lagged, the parts shelf grew, or profit itself was thin.

The Income Statement leftover is the usual starting point, not the answer. This block then adjusts for charges that were not cash and for receivables, inventory, and payables that moved.

The Balance Sheet does not print this total as its own line. The accounts receivable, inventory, and accounts payable balances that explain the gap sit there instead.

A profitable month can still show a weak operating cash total. That usually means the shop is waiting on invoices or has stocked the shelf.

Investing and financing are the other two blocks on the same statement. This page stays on the day-to-day block at the top.

How it works

Most small-business books start this block at net income. They then add back charges that reduced profit without moving cash, such as depreciation expense.

They next adjust for working-capital movements. If receivables rose, the shop sold more than it collected, so this block goes down.

If inventory rose, cash went onto the shelf. If payables rose, the shop held onto cash by taking longer to pay vendors.

Stay with the day-to-day cash when you read the block. A new workstand is an investing outflow, even if the shop uses it every Saturday.

Do not treat the Income Statement leftover as this figure. Profit can be healthy while this block is smaller, because customers have not paid yet.

Cash and cash equivalents on the Balance Sheet should move by the sum of this block plus the two below it. This block is only the day-to-day piece of that move.

Example

Ridge Line Cycles posts $8,000 of net income in June. Depreciation on the shop fixtures is $1,500, and that charge did not move cash.

Receivables rose $3,000 because a school-team order is still unpaid. Start at $8,000, add the $1,500, subtract the $3,000, and operating cash is $6,500.

The $6,500 is the day-to-day cash for June. It is not the $8,000 leftover on the Income Statement.

If the school had paid before month-end, receivables would not have risen. This block would have been $9,500, which is profit plus the depreciation add-back.

Inventory and payables did not move in this simple read. Those two accounts would have changed the $6,500 if the parts shelf or the vendor balance had shifted.

Buying a $2,000 workstand with cash would not change this $6,500. That purchase sits in the investing block below.

Common mix-ups

Cash flow from operations is not net income. Net income is the leftover after every expense; this block is the cash from running the shop.

Cash flow from operations is not the whole Statement of Cash Flows. Investing and financing sit below this block and can move cash the other way.

Cash flow from operations is not cash in the till at month-end. It is the movement from day-to-day work during the period, not the ending balance.

Related terms

• Statement Of Cash Flows: A statement that explains how cash moved through operating, investing, and financing activities during a period.
• Net Income: What is left from revenue after every expense, including interest and taxes, is subtracted.
• Changes In Working Capital: The cash effect of movements in receivables, inventory, and payables.
• Non-Cash Expenses: Charges that reduce profit without moving cash.
• Indirect Method: Building operating cash flow by starting at net income and adjusting for non-cash and working-capital items.
• Free Cash Flow: Operating cash flow left after the capital spending needed to keep running.
• Operating Cash Flow Ratio: Operating cash flow measured against current liabilities.
• Cash Conversion Cycle: The number of days between paying for inputs and collecting from customers.