Operating Cash Flow Ratio Formula - How to Calculate Operating Cash Flow Ratio

Understanding and identifying operating cash flow ratio is a crucial part of financial monitoring to ensure businesses are performing well.

Operating cash flow (OCF) ratio is a metric to help understand how liabilities are impacting a business and whether it’s in the best position to grow.

This article will look at what operating cash flow ratio is, the formula to calculate operating cash flow ratio, and examples to help you better understand the role of this metric.

What is operating cash flow ratio?

Let’s first dive into what operating cash flow ratio is.

Essentially, cash flow ratio is a metric that focuses on liquidity and understanding the financial performance of a business.

Operating cash flow ratio is a measure of whether companies can pay off liabilities with the cash flow generated from business operations.

It’s easy to get it confused with operating cash flow, but there is a difference.

• Operating cash flow looks solely at how much cash is coming in and out due to the operation of a business.
• Operating cash flow ratio looks at whether current cash flow adequately enables businesses to pay off their liabilities.

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Operating cash flow ratio - formula

Now that a definition has been established, it’s time to look at how to calculate operating cash flow ratio.

The formula is:

Operating Cash Flow Ratio = Operating cash flow / Current Liabilities¹ ²

Let’s take each component individually to understand what number needs to be plugged in.

• Operating cash flow is the cash generated through a company’s normal business operation.

• Current liabilities are defined as any debt or obligation your business must pay to creditors within a year.

Operating cash flow ratio - example

While operating expenses and current liabilities will differ based on the sector and industry, it’s important to understand each category to make calculating operating cash flow ratio easier.

Examples of operating cash flow can include:

• wage expenses, such as if you’re paying employees overseas from within the US

• any office rent and expenses for multiple locations where you’re operating

• inventory storage and warehouses across different locations, etc.

Current liabilities refer to short-term financial payments businesses are obligated to make, typically within one year of a business operating cycle.

Examples can include:

• supplier payments

• short-term debt payments such as loans

• and dividend payments to investors.

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Sources:

1. Corporate finance institute - Operating cash flow ratio
2. Gocardless - Operating cash flow ratio formula

All sources checked 30 September 2021