AsktheVC: How Do You Calculate Operating Cash Flow

Yesterday I posted the following as a guest blogger to Brad Feld’s and Jason Mendelson’s popular blog, AsktheVC.

Matt takes on the following question: What are some of the best
ways you’ve seen to sensibly estimate and/or calculate capital and/or
operating cash flow, and how do you like to see this presented to an
investor?

Cash is the life’s blood of any company. It comes from either the
company’s operations or from raising capital.  There are a number of
definitions of cash flow. I prefer to focus on what the core operating
business is generating or burning net of any financing activity. As a
result, I look at Operating Cash Flow minus Cap-X. A gross
generalization of this includes (apologies to all of my accounting
& finance profs):

Net Income
plus depreciation, amortization and other non-cash cash income statement items
minus working capital needs
minus core, recurring capital expenditures (exclude large one time charges)

Since both working capital and cap-x can vary significantly monthly,
you should average across a period of time that smooths out the swings
such as the average monthly cash flow for a 3 or 6 month period. You
should also understand how this changes as your business ramps since it
will impact your financing needs.

I define capital as debt plus equity. Should your business consume
cash (as defined above), you will need to finance it through either
raising equity or taking on debt. This can include facilities such as
working capital lines to finance receivables and inventory or lease
lines to finance capital expenditures.

In the end, cash flow and capital are two sides of the same coin.

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