Operating Cash Flow (CFO) measures the cash generated directly from a company’s core commercial operations. It is the ultimate indicator of whether a business can sustain itself without external funding.

Dissecting CFO Methods

• Indirect Method: Starts with Net Income and adjusts for non-cash expenses (depreciation, amortization) and working capital changes. This method is preferred by analysts for diagnosing accrual quality.
• Direct Method: Lists actual cash collections from customers and cash payments to suppliers and employees. This method offers superior transparency into raw cash volatility.
• Working Capital Drags: A firm can show strong net income while bleeding operational cash if it is aggressively accumulating slow-moving inventory or uncollected accounts receivable.