What is Cash Flow from Operations?
Cash flow from operations (CFO) is the cash a business generates from its core trading activities, before any spending on long-term assets or financing. It is the most important section of the cash flow statement because positive and stable CFO is what allows a business to invest, repay debt and reward shareholders without raising new funds.
How It Works
- Take net income (indirect method) or list operating receipts and payments (direct method).
- Adjust for non-cash items such as depreciation and amortization.
- Add or subtract changes in working capital.
- The result is operating cash flow.
Saudi Context
Saudi auditors review CFO closely to assess going concern: a profit on paper coupled with negative operating cash flow is a major red flag, especially for VAT-registered businesses with growing receivables.
Example
If net income is SAR 80 million, depreciation is SAR 15 million, inventory rose by SAR 5 million and payables rose by SAR 10 million, CFO is 80 + 15 – 5 + 10 = SAR 100 million.