For any business, the operating cash flow ratio is an important measure of profitability. For small business owners, it is essential. But with so much of your time spent running and growing your business, it can be challenging to manage the cash flow of your business and keep track of just how well your company is doing.

The operating cash flow ratio provides a clear financial assessment of your company’s needs and can help you plan for the health of your business.  

What is the Operating Cash Flow Ratio?

The operating cash flow (OCF) ratio is the measure of money earned and spent by your business. This is a simple enough idea—with powerful results. The OCF ratio lets you know if you are prepared to cover your expenses and how much cash you have on hand for any short-term needs.

It might seem that a smaller business wouldn’t need to use ratios and formulas. But in fact, cash flow is often an issue for entrepreneurs. If you have a firm grasp on your operating cash flow ratio and know how your cash ebbs and flows, you’ll be less likely to be surprised by a shortage in revenue. 

The higher your OCF ratio, the healthier your company. You’ll be able to cover upcoming bills and still have earnings left over.

The Formula to Calculate the Operating Cash Flow Ratio

The formula for your operating cash flow ratio is a simple one:

Cash Flow from Operations (CFO) divided by Current Liabilities (CL) or:

CFO / CL = OCF Ratio

Start by calculating your incoming cash—your CFO. The key here is to focus on your company’s regular business operations. You want this number to be as realistic and consistent as possible. What is your business bringing in each month? Each day? There is no more critical number to your business than that consistent inflow of cash.

There are many different formulas that accountants and investors use to assess a company. But for a small business owner, it’s essential to have a firm grasp of the day-to-day.

Cash flow from operations is your total revenue from normal operations (do not include investments, for example). Next, tally up all of the business’s operating expenses for the same time period. 

Total Revenue – Operating Expenses = Cash Flow from Operations

Think of CFO as net income. Take your generated revenues—and deduct the cost of the goods you sold plus the operating expenses associated with those sales.

Next up: current liabilities. Current liabilities are one that you’ll need to pay within a one-year time frame.

Now we can find our Operational Cash Flow Ratio!

When you divide the cash flow from operations by your current liabilities, you’re looking for an Operational Cash Flow Ratio of more than 1. Anything higher and you may have some extra cash—lower, and it can mean your business is faltering.

Example of Operating Cash Flow Ratio

Here’s an example of a healthy operating cash flow ratio from Intel Corporation:

You can track your own OCF ratio with different tools and analytics—but why track it all?

What are the Advantages of Operating Cash Flow Ratio Analysis

Analyzing your cash flow ratio can bring a lot of insight into your business. For example:

  • Is my small business actually making me money?
  • Is the company financially solvent in the short term?
  • Will there likely be some profit that I might use this year and invest in my business?
  • Could I pay myself more? Or should I be tightening the belt (decreasing liabilities)?

One of the advantages of the OCF Ratio is that it’s relatively straightforward. Investors often look closely at the OCF ratio as an indicator of a healthy business.

However, for any small business owner, the greatest advantage to knowing and analyzing your OCF Ratio is clarity. It gives a measure of how your company can pay off debts with the cash it generates—in the same time frame. 

Because the ratio shows how you’re doing in the given year, it will allow you to identify trends, watch out for common “downturns,” and plan for the future. 

Simple “in-and-out” cash accounting doesn’t provide that kind of empowered decision-making. Far too often, you can’t see your business’s strengths and weaknesses because you’re too busy having to run the business. 

Limitations of the Operating Cash Flow Ratio

The limitation of only utilizing cash flow ratio to measure the success of your business is that it is only one way method of analysis. There are many other methods of accounting that can give a deeper understanding of your business, particularly when you’re looking further into the future than just one year.  Besides cash accounting, there is accrual accounting, or hybrid methods, as well as different analytical techniques. 

The good news: there are a lot of apps and programs that can help. And North One has amassed a powerful set of tools for you.

How North One Can Help

North One is the branchless bank for small business owners. It provides an affordable business account. A low monthly fee of $10 a month allows you most of the transactions your business needs, from ACH payments to deposits to ATM access, at no extra charge.

The monthly fee also gives clients access to our powerful budgeting tool, Envelopes. When you’re calculating your operating cost, the envelope budget system will help you budget your payments on your business’ ideal schedule—daily, weekly, or monthly.

North One is a leader and innovator in the digital realm and syncs up with similar companies. So you’ll be able to access and integrate any accounting program you use for your business now. This feature unlocks even more opportunities for analysis.

The North One team is also constantly on the lookout for information, case studies, and tips to give small business clients advantages they can use every day. Our ever-growing library of articles is a resource for all.

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