May 7 2007 by Brad

How Do You Calculate Operating Cash Flow?

Today’s guest blogger is Matt McCall of Draper Fisher Jurvetson Portage. Matt writes a popular blog called VC Confidential.

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.