Why Operating Cash Flow is more important than Net Profit but is still ignored

Let’s first define Net Profit and Cash Flows before we proceed further to explore the importance of each of terminologies.

Definitions:

Net Profit (NP) comes from Profit and Loss (P&L) statement while OCF comes from Cash Flow statement.

Net Profit: Net of revenue or sales after removing all operating expenses, depreciation, interest and taxes and including any other income, and taking into account exceptional items.

Operating Cash Flows (OCF): The net cash generated from operations.

Investing Cash Flows (CFI): The net result of capital expenditures, investments, acquisitions, etc.

Financing Cash Flows (CFF): The net result of raising cash to fund the other flows or repaying debt.

Why OCF and not NI:

The OCF is a better metric of a company’s financial health for two main reasons. First, cash flow is harder to manipulate than net income. Second, “cash is king” and a company that does not generate cash over the long term is heading to get wiped out. The OCF gives you the picture about the cash received in the organization. Without cash, the company may not be able to fulfill its promise to make payments to suppliers, employees and financial institutions on a sustainable basis.

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