The Role of Operating Cash Flow
An operating cash flow forecast describes how cash generated exclusively from core trading (operations) is expected to have increased or decreased as at the end of the forecast year.
Operating cash flow arises exclusively from core trading activity. It is the only cash capable of servicing external financing. For that reason it is a crucial component of any business plan, especially if that is to be presented to a bank or other senior lender.
Forecast Net Revenue
This starts with net operating revenue.
It is calculated as operating profit minus cashless provisions; for example depreciation, taxes and gains or losses unconnected with core trading activity. That's why items such as profits or losses from the sale of fixed assets, income from investments or deductions such as dividends are excluded.
Forecast Cash Flow from Working Capital
The Increase or decrease in net current assets (current assets less current liabilities) are then added to net revenue. Net current assets are commonly known as working capital which is the source of financial liquidity.
Forecast changes in working capital from the previous year affects operating cash flow may seem counter intuitiive. That is because an increase in working capital actually ends up decreasing it. Why that is so is explained next.
Forecast Cash Flow from Current Assets
Increases in current assets such as stock or accounts receivable reduce operating cash flow. The reason for that is that increased stock represents an increased financial commitment while higher accounts receivable, an increase in virtual loans to customers.
Forecast Cash Flow from Current Liabilities
In the case of current liabilities, increased trade or sundry creditors represent increased virtual loans from suppliers.
That means they contribute to operating cashflow. Note however this only applies to current liabilities; debts with respect to financing of any kind such as a bank overdraft do not feature.
Reduced current liabilities reduce operating cash flow in turn, as that represents repayment of virtual loans.
Follow the link below to view a working example of the operating cash flow forecast that Figurewizard produces in a simple and straightforward manner.
Having read this piece am still not clear on the importance to my planning of operating cash flow forecasts over the monthly bank and cash forecasts figurewizard produces. Surely if the bank and cash forecasts shows that a company has all the cash it needs to pay its bills when they are due that is all anyone needs?
The operating cash flow forecast differs from the monthly bank and cash forecast in that it describes how much cash a company is likely to generate solely through its trading (operating) activities. That and only that represents how much cash is forecast to be available for the purpose of servicing new or additional financing.
Banks and other potential senior creditors or investors will always measure operating cash flow before making a decision. For that reason when using Figurewizard to forecast and plan your business it is vital that you also know how much operating cash flow is going to be available to you? If the answer is not enough then it will be time to go to the What-If calculator and revise your budgets.
I can see how an operating cash flow can benefit from extended credit from suppliers because that is equivalent to a loan. What I don't get is why if I select a loan in the what if calculator and make it repayable in four years, the forecast for operating cash flow does not improve.
The reason that loans do not feature in operating cash flow is because they are classed as financing, even if the loans is being made by a director.
If you go back to the operating cash flow forecast and check on the financing section at the bottom of the screen, you will see it there.