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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About AIWMI

The Association of International Wealth Management of India (AIWMI) is a not-for-profit organization and a globally recognized membership association for finance professionals. AIWMI primarily focuses on the broad and strategic role of developing a more robust and forward-looking training infrastructure for the financial services sector and to promote more active industry involvement and collaboration in training and continuing education. AIWMI is offering advanced international certification programs along with a wide variety of high-quality executive education programs. AIWMI programs combine state-of-the-art knowledge and skills with practical experience and insights into the functioning of the financial sector. All AIWMI courses and educational events have an intense and pragmatic curriculum. Participants are exposed to the latest developments within the financial services sector. AIWMI plays a key role in guiding the development of the financial services sector. AIWMI works with key industry participants’ viz. the Government, the Regulators, the Industries/Associations, the Corporate, the Media and the General Public to achieve its objectives. Besides enhancing technical competence and professionalism in the industry, AIWMI organizes events and facilitates discussions to promote best practices in leadership and talent development in the financial sector with an aim to become Asia’s premier center of excellence for financial education.

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