What is Cash from Operating Activities?
Cash from operating activities is a measure of a company’s cash inflows and outflows resulting from its core business operations. In other words, it reflects the cash generated or used by a company’s day-to-day activities, such as selling products or services, paying suppliers, and collecting customer payments.
Why is Cash from Operating Activities Important?
Cash from operating activities is a crucial metric for investors, analysts, and other stakeholders, as it provides insights into a company’s ability to generate cash from its core business activities. A positive cash flow from operations indicates that a company’s operations are generating more cash than it is using, while a negative cash flow from operations suggests that a company is using more cash than it is generating.
Cash from operating activities is also an important metric for evaluating a company’s sustainability, as it reflects the cash available for reinvesting in the business, paying dividends to shareholders, and reducing debt.
Calculating Cash from Operating Activities
The cash flow statement is used to calculate cash from operating activities. It consists of three sections: operating activities, investing activities, and financing activities.
The operating activities section includes cash inflows and outflows related to a company’s core business operations. It typically includes cash received from customers, cash paid to suppliers, and cash paid to employees.
To calculate cash from operating activities, we start with net income and add back non-cash expenses such as depreciation and amortization. We then adjust for changes in working capital, including accounts receivable, accounts payable, and inventory.
Here’s an example of how to calculate cash from operating activities:
Net income: $100,000
Add back non-cash expenses: +$20,000 (depreciation and amortization)
Increase in accounts receivable: -$10,000
Increase in accounts payable: +$5,000
Decrease in inventory: +$2,000
Cash from operating activities: $117,000
In this example, the company generated $117,000 in cash from its core business operations.
Cash from Operating Activities vs. Free Cash Flow
It’s essential to note that cash from operating activities is different from free cash flow. While both metrics are used to evaluate a company’s financial health, free cash flow takes into account cash used for investing activities such as capital expenditures, acquisitions, and other investments.