Understanding Operating and Cash Cycles

---

Cash flow within a business is the difference between the number of dollars that came in and the number of dollars that went out. While no standard financial statement presents this information in a clear way, we can still calculate the cash flow. In order to have a comprehensive understanding of cash flow, we look at the following criteria:

Cash From Operating Activities

• Operating Cash Flow: Include the revenues minus the costs. These numbers include taxes but exclude depreciation and interest. This is an important number because we can see how successfully a firm’s cash inflows cover everyday cash outflows.
• Change In Net Working Capital: As you make changes in your investments towards current assets, your current liabilities will usually change as well. This is calculated by taking the difference between the beginning and ending net working capital figures. 

Cash From Investing Activities

• Capital Spending: Net capital spending is the money spent on fixed assets net of any sales of those fixed assets. 

Cash From Finance Activities

• Creditors: Your interest payments to creditors with a reduction of net new borrowings
• Stockholders: Your dividends paid out by a firm minus new equity raised.

Operating and cash cycles can go hand and hand with cash flow projections. Most accountants do not go into the complexity of how well a company is generating cash and profits or just don’t have the time to provide this service. But understanding your businesses’ operating and cash cycles is critical into planning in the future. Full Cycle CFO offers this service because by following the operating cycle of a business, we can give a better view for when to produce more product to avoid shortages, productions delays, and stock outages. And, on the flip-side of that, to also avoid over-production and having inventory sit. Full Cycle CFO has the team and expertise to give the outlook you need to make decisions to keep inventory and production in tune with the selling and generating of cash. It is a delicate balance that needs an expert’s point of view.