Cash Flow From Operations: Understanding Business and Finance

Cash flow from operations (CFO) is an important concept for college students learning about business and finance. CFO is the net cash generated from the core operating activities of a business. It is obtained by deducting operating expenses such as cost of goods sold and selling, general and administrative (SG&A) expenses from the total operating revenue.

How CFO Relates to Businesses

CFO shows how much cash a company is generating from its core operations and can be used as an indicator for evaluating the performance of a business. Investors and lenders use the CFO figures tucked away in the financial statements as an important source of information. It also shows the ability of a company to pay debts and bills and pursue growth activities in the future.

How CFO Relates to Stock Investing

For stock investors, understanding how to interpret CFO figures is essential for knowing the underlying health of a company. Investing in stocks without regard to CFO can be risky and it is always important to consider the CFO of a company before investing. Stocks of companies with a strong CFO tend to outperform those with weak CFOs in the long run, as those companies are more likely to be able to generate higher profits over time.

Understanding CFO in Practice

Let’s look at an example of how to interpret CFO figures in practice. Let’s say ABC Company has $2 million in revenue generated from its core business activities in the past year. Its total SG&A expenses was $1 million and its cost of goods sold was $600,000. CFO for ABC Company would be $400,000 ($2 million – $1 million – $600,000). This means that ABC Company is generating $400,000 in net cash from its core business activities.

The Bottom Line

CFO is an important concept for college students learning about business and finance. It is the net cash generated from the core operating activities of a business and is used by investors and lenders as an indicator for evaluating the performance and health of a company. Therefore, understanding how to interpret CFO figures is essential when it comes to stock investing.