Understanding Cash Flow from Operations: A Key to Financial Health

Introduction to Cash Flow

Think of cash flow as the lifeblood of your business. It tracks the money flowing in and out, from customer payments to supplier invoices. But not all cash flows are created equal.

Cash flow from operations (also known as operating cash flow or OCF) focuses specifically on the cash generated from your day-to-day business activities. This excludes cash from investments or loans. In other words, it’s the cash your business earns by doing what it does best — selling products or providing services.

For example, if you run a boutique in Orchard Road, your cash flow from operations would include cash received from customers and payments made to your suppliers, not the money you get from selling old equipment or taking out a loan.

Understanding cash flow isn’t just for accountants. It helps you:

• Make smarter financial decisions
• Spot cash flow problems early
• Plan for growth with confidence

Cash Flow Statement: The Bigger Picture

To fully grasp cash flow from operations, you need to know where it sits in your financial reports. Enter the cash flow statement, which is one of the three key financial statements, alongside the income statement and balance sheet.

The cash flow statement summarises all your cash movements over a specific period and is divided into three sections:

• Operating activities
• Investing activities
• Financing activities

The operating activities section is where the magic happens. It gives you a clear picture of your cash flow from operating activities — the cash generated (or used) by your core business functions.

While the income statement reflects profitability, it doesn't always show your true cash position. 

• For example, you might record sales as revenue before the customer actually pays you. That’s why reviewing the cash flow statement is equally important to assess your financial health.

Suppose you're running a Tiong Bahru bakery and earned S$50,000 from cake sales but spent S$30,000 on ingredients, rent, and salaries. In that case, your net operating cash flow might be around S$20,000 — assuming no other adjustments.

• Unlike your income statement (which can include non-cash items), your cash flow statement gives a real picture of liquidity: how much cash you actually have available.

Calculating Cash Flow from Operations

So, how do you actually calculate cash flow from operations? There are two primary methods:

1. Direct method
2. Indirect method

The Direct Method

This method is straightforward. You add up all the cash received from customers and subtract some money paid to suppliers, employees, and others. It gives a clear, real-time view of cash movements.

The Indirect Method

More commonly used, the indirect method starts with net income from your income statement. Then, you adjust it by:

• Adding back non-cash costs such as depreciation and amortisation
• Accounting for working capital changes (such as inventory, accounts receivable, and accounts payable)

Under the indirect method, companies start with net income and then adjust for non-cash expenses and changes in working capital. Both methods should yield the same result, giving you a reliable measure of your cash flow from operations.

Cash Flow from Operations Formula (Indirect Method)

Cash Flow from Operations = Net Income + Non-Cash Expenses (Depreciation, Amortisation) + Changes in Working Capital (e.g. Accounts Receivable, Inventory, Accounts Payable)

Let’s say your café has:

• Net income: S$50,000
• Depreciation: S$5,000
• Increase in accounts receivable: S$3,000
• Increase in accounts payable: S$2,000

Your operating cash flow would be:

S$50,000 + S$5,000 - S$3,000 + S$2,000 = S$54,000

So even though your net profit was S$50,000, you actually generated S$54,000 in real cash from your operations, thanks to non-cash adjustments and better management of payables and receivables.

Cash Flow from Operating Activities: Why It Matters

Your cash flow from operations indicates how well your core business is doing. It's determined by adding back non-cash charges to net income and adjusting for net working capital changes.

This measure is important because it informs you whether your business is producing sufficient cash to:

• Pay bills and wages
• Reinvest in growth
• Cover unexpected expenses

For instance, if your operating cash flow is always negative, even if your income statement indicates profits, that's a warning sign. It suggests that you may be unable to pay your obligations without borrowing.

Operating cash flow gives you an idea of how well your business can pay its short-term obligations and finance its own growth without taking out loans or attracting investors.

Managing Accounts Receivable and Accounts Payable

You may have heard the expression, “Revenue is vanity, profit is sanity, and cash is reality.”

One of the best ways to control your cash flow from operations is by managing accounts receivable and accounts payable wisely.

Accounts Receivable

When customers owe you money, it’s listed as accounts receivable. But until you collect it, it’s just numbers on paper.

What you can do:

• Offer early payment discounts
• Send regular payment reminders
• Shorten payment terms if possible

Accounts Payable

This is what you owe your suppliers. By managing it smartly, you can keep cash longer in your business.

Tip: Managing accounts payable effectively can help companies extend payment timelines and improve their operating cash flow.

Just don’t stretch it too far — damaging supplier relationships isn’t worth it.

For example, a small logistics company in Singapore that extends its accounts payable cycle from 30 to 45 days while keeping receivables under 30 days can significantly improve its cash flow from operations and gain more liquidity to manage peak delivery seasons.

Current Assets and Current Liabilities: The Balancing Act

Your current assets and current liabilities play a huge role in cash flow.

• Current assets include cash, accounts receivable, and inventory
• Current liabilities include accounts payable and short-term debts

The difference between them is called net working capital. Keeping this balance healthy ensures your business has enough cash to operate smoothly.

For example, if you tie up too much cash in inventory that doesn’t sell quickly, your cash flow suffers. On the other hand, delaying payments to suppliers (without damaging relationships) can free up cash.

In Singapore, where operating costs can be high, SMBs must carefully manage working capital to maintain liquidity and financial stability.

Capital Expenditures and Cash Flows

Let’s talk about capital expenditures (CapEx). These are investments in long-term assets like property, machinery, or tech upgrades.

While necessary for growth, CapEx requires significant upfront cash, which can impact your cash flow. That’s why you should weigh such investments carefully.

This is why free cash flow (FCF) matters. 

Free cash flow, calculated by subtracting capital expenditures from operating cash flow, provides a clearer picture of the cash available for expansion or debt repayment.

Free Cash Flow = Operating Cash Flow – Capital Expenditures

For example, if your operating cash flow is S$200,000 and you spend S$50,000 on new equipment, your free cash flow is S$150,000 — money you can use for growth or debt reduction.

Importance of Cash Flow Management

Cash flow management isn’t just a back-office task — it’s mission-critical for your business’s survival and growth.

Good cash flow management helps you:

• Pay your staff and suppliers on time
• Avoid expensive short-term loans
• Invest confidently in new opportunities

Poor cash flow management, on the other hand, can lead to serious trouble, even for profitable companies. A business can go bankrupt not because it's unprofitable, but because it runs out of cash.

In Singapore's competitive market, where payment terms can be tight and costs high, mastering cash flow management gives your SMB a real edge.

Common Cash Flow Mistakes to Avoid

Even seasoned business owners sometimes slip up. Here are some common cash flow mistakes:

• Poor management of accounts receivable and accounts payable
• Overestimating sales and underestimating expenses
• Inadequate cash flow forecasting
• Insufficient cash reserves for emergencies

It is crucial to avoid these mistakes. Cash flow problems can reduce financial flexibility, force you to take on expensive debt, or even lead to bankruptcy.

By prioritising cash flow management, your business can maintain stability and stay agile in uncertain times.

Best Practices for Cash Flow Management

Ready to level up your cash flow game? Here are some best practices used by successful Singapore businesses:

• Use digital invoicing tools to track receivables in real time.
• Negotiate payment terms with suppliers to delay outflows.
• Monitor inventory closely and avoid overstocking.
• Use accounting software to generate real-time cash flow statements.
• Forecast cash flow monthly, not just annually.
• Keep a cash reserve to cover at least 3–6 months of expenses.

Effective cash flow management requires ongoing attention. It’s not a set-and-forget task. Regular monitoring and fine-tuning ensure your business stays financially healthy and prepared for growth.

Conclusion and Future Outlook

In conclusion, cash flow from operations is a critical metric that goes beyond just tracking profits. It tells you whether your business can sustain itself, pay its bills, and invest in its future — all from the cash generated by its core activities.

As an SMB owner in Singapore, mastering cash flow management isn’t optional — it’s essential. Understanding and managing your cash flow from operations gives you an edge in decision-making, planning, and long-term stability.

If you’re tired of scattered spreadsheets, missed payments, or guessing where your cash went, Aspire can help. From automated invoicing to real-time cash tracking and seamless bill payments, Aspire supports small and medium businesses in Singapore with modern financial tools designed to put you in control.

The future of cash flow management is only getting more critical, especially with market uncertainties and rising operational costs. Stay proactive, stay informed, and keep your cash flowing — because cash truly is king in business.

Want to optimise your cash flow? Explore Aspire’s cash flow solutions today.