What is an Operating Cash Ratio?
An operating cash flow ratio depicts the relationship between the current liabilities of the firm and the total inward flow of cash, during a singular accounting year. The need and premise of this ratio can be explained as follows.
In the modern business world, every company tends to have a certain set of liabilities, known as the current liabilities. These liabilities are chiefly the ones which expire within a year or in the near future. In short the company is obliged (legally) to pay off the said liabilities.
Since the proceeds from the borrowed current liabilities contribute to the current production or provision of services, it is understood, or rather it is healthy and profitable for the business to recover the cost of current liabilities from current income.
The operating cash establishes a ratio between the current income, also known as inward cash flow or cash flow arising form current operations and the current liabilities owed.
The resultant figure depicts how much portion of the income is to be dedicated to paying off current liabilities. Inversely, it also depicts how much amount of income is owed to a current liability, or it also depicts how much portion of the liability is yet to be paid off from current income (the last one is applicable in case if the ratio is less than one). On the whole, a company or a firm's liquidity with respect to current income and liabilities is summarized within one ratio.
Operating Cash Flow Ratio: Formula and Calculation
The formula and calculation of the operating cash flow ratio is quite simple and straightforward. The formula goes as:
Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities
In this formula, there are three very important things which are not included:
Non cash income, such as goods sold on credit goods, sold against a bill of exchange is not recorded as though minute and in some cases ridiculous, there is always a probability of a debtor defaulting upon such credit.
Long term liabilities such as a loan installment due, 2 years from date are also not included.
Any kind of differed, non cash, accrued income, income not relating to operations is not included in the formula.
An operating cash flow ratio depicts the relationship between the current liabilities of the firm and the total inward flow of cash, during a singular accounting year. The need and premise of this ratio can be explained as follows.
In the modern business world, every company tends to have a certain set of liabilities, known as the current liabilities. These liabilities are chiefly the ones which expire within a year or in the near future. In short the company is obliged (legally) to pay off the said liabilities.
Since the proceeds from the borrowed current liabilities contribute to the current production or provision of services, it is understood, or rather it is healthy and profitable for the business to recover the cost of current liabilities from current income.
The operating cash establishes a ratio between the current income, also known as inward cash flow or cash flow arising form current operations and the current liabilities owed.
The resultant figure depicts how much portion of the income is to be dedicated to paying off current liabilities. Inversely, it also depicts how much amount of income is owed to a current liability, or it also depicts how much portion of the liability is yet to be paid off from current income (the last one is applicable in case if the ratio is less than one). On the whole, a company or a firm's liquidity with respect to current income and liabilities is summarized within one ratio.
Operating Cash Flow Ratio: Formula and Calculation
The formula and calculation of the operating cash flow ratio is quite simple and straightforward. The formula goes as:
Operating Cash Flow Ratio = Cash Flow from Operations / Current Liabilities
In this formula, there are three very important things which are not included:
Non cash income, such as goods sold on credit goods, sold against a bill of exchange is not recorded as though minute and in some cases ridiculous, there is always a probability of a debtor defaulting upon such credit.
Long term liabilities such as a loan installment due, 2 years from date are also not included.
Any kind of differed, non cash, accrued income, income not relating to operations is not included in the formula.
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