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5 Ways that Businesses Measure Cash Flow

Cash Flow from Operations

Cash flow from operations is considered one of the best measurements of a company's overall financial health. The term "operations" refers to the core business activities of a company. The operations of Ben & Jerry's, for example, is making and selling ice cream. The operations of H&R Block is developing and selling its tax preparation services. Cash flow from operations measures the money that comes in and flows out (expenses) from core business activities.

In most large business, there are very few direct and immediate cash transactions. Instead, there is a whole system to handle delayed payments managed by two departments, called accounts receivable and accounts payable. Let's say the Dunder Mifflin paper company orders 50 truckloads of lumber to turn into paper. It doesn't have the cash on hand to pay for the lumber, so the bill is sent to accounts payable. Meanwhile, salesman Dwight gets an order for 50,000 reams of paper, but the client will need 30 days to send over the money, so the invoice goes to accounts receivable.

On the earnings statement, the paper orders count as income and the lumber counts as an expense, even though the bills and invoices are still sitting in accounts payable and accounts receivable -- and no money has actually changed hands. Cash flow from operations, on the other hand, only concerns itself with the moment those accounts are paid in full. For investors, operating cash flow is a valuable indication of how much real cash a company generates from its core business activities.

If a company has good operating cash flow, but negative earnings, it could mean that it's investing heavily in growth. One of the best ways to find out is to look at the cash flow from investments, which we'll tackle next.