How is the Operational Cash Flow calculated?

The Operational Cash Flow is the ‘lifeblood’ of the business – the ability to fund growth and make strategic investments, and is one of the primary RTC measures.

The calculation of operational cash flow begins with the calculations of Core Money In and Core Direct Cash Out – the difference gives us a core contribution margin.

Core Money In

Core Money In is annual invoicing from the income statement, adjusted by the movement in Accounts Receivable.  If AR has gone up, you have collected less money so the increase is deducted from the invoiced amount. If AR has gone down, you have collected more money so the decrease is added to the invoiced amount.

• If AR has increased, this is deducted from Core Money In.
• If AR has decreased, this is added to Core Money In.

Core Direct Costs Out

Core Direct Costs Out is Operational Direct Costs excluding depreciation, adjusted by the movement in Inventory and the movement in Payables.  If inventory has increased, you are holding more inventory which means you have used more cash, so the core cash out is increased.  If inventory has decreased, you are holding less inventory so the core cash out is decreased.

If AP has gone up this has reduced the amount of money that has gone out, so the increase is deducted from core cash out.  If AP has gone down this has increased the amount of money that has gone out.

• If Inventory has increased, this is added to Core Direct Costs Out
• If Inventory has decreased, this is deducted from Core Direct Costs Out
• If AP has increased, this is deducted from Core Direct Costs Out
• If AP has decreased, this is added to Core Direct Costs Out

Core Money In less Core Direct Cash Out = Cash Contribution Margin

The Cash Contribution Margin is then adjusted by the following:

less Operational Indirect Costs (excluding depreciation)
add Net Miscellaneous Revenue or less Net Miscellaneous Expense (a net miscellaneous revenue will show as a positive amount, a net miscellaneous expense will show as a negative amount).
add Cash from Miscellaneous Balance Sheet movements or less Cash to Miscellaneous Balance Sheet movements (see How is the Cash From/Cash To Misc Operating Balance Sheet Movements calculated?)

= Operational Cash Flow