In finance, the most basic of looking at a company’s performance is to compare the operating cash flow with your net profit. If the net cash from operating activities is equivalent to your net profit, it generally shows that your profits are supported by cash.

In simple terms, a company’s cash cycle for any period can be classified into operating (i.e. sales, purchases, salaries, rental, utilities, etc), investing (i.e. purchase of fixed assets, investment in companies) and financing (i.e. bank loans).

If your operating cash flow is in a surplus position, it shows that your operations from the company for the period has generated a positive cash inflow from its daily operations.

However, you will need to take the net cash from operating activities and minus your capital expenditure (i.e. purchase of fixed assets and intangible assets under investing activities) will allow you to derive a financial measurement called free cash flow (FCF).

If your FCF for the year is in a large positive surplus, it means that your company is strong enough to finance any operations with its own funds on top of your fixed assets maintenance.

FCF can be used for the following to name a few: paying dividends, expansion, repayment of loans, etc.

FCF has been widely used in finance to value a company because of it is based on cash flow rather than profits which can be easily manipulated.

If a company has positive net cash from operating activities of $100,000 but capital expenditure of $200,000 for the year, a relook have to be done on the bulk of capital expenditure incurred.

However, if a company has negative net cash from operating cash flows, you may have to focus on relooking your operational cycles e.g. your debtor and payment cycles, etc.

As with all other calculations, the figures will be inaccurate if the inputs are wrong e.g. non-cash items included, wrong classification of related parties’ transactions, etc.