What is Operating Cash Flows?
Operating cash flows are the net cash inflows and outflows generated by a business’s principal revenue-producing activities, excluding investing and financing, and form the primary source of long-term liquidity for the entity.
How It Works
- Captures cash from customers and cash paid to suppliers, employees, and tax authorities.
- Presented using the direct method (line-by-line cash receipts) or indirect method (net income reconciliation).
- Compared against net income to assess earnings quality, large gaps signal accounting or working capital strain.
- Used as the numerator in cash flow coverage ratios and free cash flow calculations.
Saudi Context
For Saudi SMEs operating under the VAT regime, operating cash flow has to net out VAT collected and remitted to ZATCA, which can be significant on a 15% base. Cash paid for employee benefits (salaries, GOSI, end-of-service) is the largest operating outflow for most service businesses.
Example
A Riyadh consultancy collects SAR 8,500,000 from clients, pays SAR 4,200,000 in salaries and GOSI, SAR 1,100,000 to suppliers, and SAR 900,000 in VAT to ZATCA. Operating cash flow = 8,500,000 – 4,200,000 – 1,100,000 – 900,000 = SAR 2,300,000.