The Operating
cash flow
(Cash flow provided by operations)
is a central and
crucial concept for financial
management.
It mesures the ability
of the the firm to generate, through its day-to-day
operations, a flow of cash, and therefore
evaluates its capacity for survival and for
long term growth
If it is low (or worse,
negative) over a certain period of time,
- it shows the inability of
the the company to meet its financial obligations
and
- to make the necessary Capex
required to operate efficiently and produce
funds for future periods.
The OCF is the
long term engine of the company.
Click
here to see the source of data
Starworld
Group |
2022 |
2023 |
Profit after Tax |
450 |
715 |
Depreciation |
350 |
400 |
IGF |
800 |
1115 |
|
- 18 |
- 102 |
Operating Cash Flow |
782 |
1013 |
What are the reasons
If OCF < IGF :
1. the accounts receivables
have increased due to problems faced by
our customers
2. the inventories might have gone up because
of difficulties in the marketplace
For example If (IGF
- WCR) = -300 :
1. that means that you
have to find outside ressources
2. and this before talking about strategic
expenses such as new investments and financial
obligations
The OCF is the
basic and fundamental source of cash for the
investment and financing policies of the company.
The higher it is, the better it is,
the more freedom and flexibility it gives
to the firm to build its LT strategy without
constraint and interference from finance.
The optimization
of OCF means 2 things :
1. Optimization of the IGF,
through increased profitability and
2. Efficient management of the WCR
a. through inventory
management
b. credit
policy management and
c. suppliers'
payment management.
Strategic decisions
=> Investing activities
Sources :
Understanding
Financial Statements, 1999,
Marc Bertonèche, Ph. D. in Finance
from the Northwestern University, Professor
at the Bordeaux University and at Sciences-PO
Paris, Visiting Professor at Harvard Business
School and Oxford University.
Corporate Finance
Course, Bernard Jaquier, Professor in
Economics & Finance, Lausanne, Switzerland, 2024