Running a business in Texas is easier when you have a clear handle on your profits and expenses. One of the best ways to do so is to adopt the Operating Cash Flow (OCF) system. This will enable you to develop a realistic evaluation of your current performance as well as your future prospects. Many industry veterans prefer OCF to all other indicators.
How OCF differs from other systems
Business transactions can be measured in several different ways. OCF is distinct from all other methods due to its different area of focus. OCF homes in on the cash that has been generated via the primary operations of your business. It does not include other areas such as interest, investment, or any other purely secondary sources of income.
If you own a public company, you will report OCF as part of your consolidated cash flow statement. This will be included in your annual financial statement. If you own a smaller privately held company, you can use OCF to subtract non-operating rental income. This will give you a better idea about the shape of your basic retail income.
Using the indirect and direct methods
Understanding your cash flow will be a crucial part of your basic accounting system. There are two types of OCF that you can use to make this determination. The indirect method begins by considering your net income. You can then use the system to work backward to obtain a cash basis figure.
The direct method starts by recording all cash-based transactions. You will then consider all the operating expenses incurred via your primary activity. This figure is subtracted from the total revenue generated by all your various income streams. The result is your viable OCF going forward.
Having a clear picture of your profits and expenses can help you make informed business decisions. You can make plans that will ensure your success.