Cash flow issues are a silent killer for businesses, especially in the UAE, where high operational costs, VAT obligations, and long payment cycles are common. In fact, over 60% of SMEs in the GCC cite cash flow management as a major challenge. And yet, many teams still rely heavily on profit-and-loss statements, which don’t reflect what truly matters: actual cash movement.
That’s where Cash Flow from Operating Activities (CFO) comes in. Unlike net income, CFO tells you how much cash your operations are really generating, accounting for things like receivables, inventory, supplier payments, and salaries. For UAE-based businesses dealing with complex vendor relationships and tax compliance, CFO is not just a metric—it’s a financial lifeline.
In this guide, we’ll break down what CFO is, how it’s calculated (direct vs. indirect methods), why it’s crucial for UAE companies, and how platforms like Alaan help you track and optimise it in real time.
TL;DR – Key Takeaways for UAE Finance Teams
- Cash flow from operating activities (CFO) shows whether your business is generating enough cash to sustain itself beyond just being profitable on paper.
- In the UAE, long receivables cycles, VAT remittances, and salary obligations (WPS) make accurate cash visibility critical.
- Direct and indirect methods are both valid ways to calculate CFO; the indirect method is more widely used under IFRS.
- CFO is vital for liquidity planning, investor confidence, VAT compliance, and operational resilience.
- Tools like Alaan automate expense tracking, receipt matching, and ERP syncing, giving real-time visibility into cash flows across teams and vendors.
What Is Cash Flow from Operating Activities?
Cash flow from operating activities (CFO) refers to the net cash generated or consumed by a business through its regular operations during a specific period. It captures the actual inflows and outflows related to selling products or providing services, such as customer payments, supplier settlements, salaries, rent, and utilities.
CFO excludes financing activities like loan repayments and investment-related cash flows, such as equipment purchases, keeping the focus strictly on core business performance.
CFO is presented as the first section of a company’s cash flow statement, followed by cash from investing and financing activities. It plays a vital role in helping finance teams measure operational efficiency and liquidity. A company might show a healthy profit on paper but still face a cash crunch if receivables are delayed or expenses outpace collections. That’s why CFO is often considered more telling than net income, especially for businesses with high transaction volumes or complex payment cycles.
For UAE-based businesses, the CFO is a key indicator of financial health in a region where managing liquidity is crucial for compliance and stability. Real-time visibility into operating cash flow is essential across industries. UAE businesses in hospitality, logistics, healthcare, or real estate rely on it to plan payroll, manage supplier payments, and stay on top of VAT obligations.
In the UAE, where corporate tax and VAT regulations necessitate accurate reporting, robust CFO practices also help mitigate compliance risk and increase investor confidence.
Monitoring the CFO regularly allows businesses to:
- Assess whether operations are self-sustaining or require external funding.
- Identify cost inefficiencies and areas of cash drain early.
- Plan future investments or expansions based on actual cash availability.
- Benchmark performance across financial quarters to track business progress.
Cash flow from operating activities acts as a financial reality check. It answers the question: Is your business truly generating enough cash to support itself, or are you relying on borrowed funds and delayed payments to stay afloat?
Key Components of Operating Cash Flow
Cash flow from operating activities (CFO) includes all cash inflows and outflows directly tied to a company’s core business operations. These components reflect how effectively a business manages its incoming revenue and outgoing expenses related to its daily operations.
For UAE-based companies, especially those in regulated industries or managing complex vendor relationships, understanding these categories is essential for controlling liquidity and ensuring financial compliance.
1. Cash Inflows from Operating Activities
Cash inflows represent the actual money received from operating the business. These are critical for maintaining working capital, covering operational costs, and funding future growth.
Common sources of cash inflows include:
- Customer payments received from the sale of goods or services.
- Collections on accounts receivable, where earlier credit sales are now converted into cash.
- Refunds or rebates from suppliers based on contract terms or bulk purchases.
- Other cash receipts from routine activities, such as loyalty reimbursements or cash-based service fees.
For UAE businesses operating on credit-heavy models, such as wholesale trading or facility management, the timely collection of receivables can significantly impact cash availability.
Efficient inflows improve short-term liquidity and reduce dependency on external funding sources.
2. Cash Outflows from Operating Activities
Cash outflows represent payments made to keep business operations running. Managing these outflows is crucial for maintaining cash reserves and preventing payment delays.
Key categories of outflows include:
- Employee salaries, benefits, and wages are often the largest recurring costs.
- Payments to suppliers or service providers for inventory, raw materials, or outsourced functions.
- Operating expenses such as rent, utilities, and insurance premiums.
- Government obligations include VAT payments, corporate taxes, and any interest on short-term borrowings.
In the UAE, where VAT compliance is mandatory and payroll must adhere to local regulations (e.g., WPS for salary disbursements), controlling outflows ensures that businesses avoid penalties and establish credibility with stakeholders.
Tracking outflows closely enables more accurate budgeting and strengthens financial control.
3. Working Capital Adjustments
Changes in working capital directly affect operating cash flow. These adjustments arise from differences in how revenues and expenses are recorded under accrual accounting versus when actual cash is exchanged.
Key working capital changes to monitor:
- Decrease in accounts receivable → cash increases (customers are paying faster)
- Increase in inventory → cash decreases (more funds are tied up in stock)
- Increase in accounts payable → cash increases (payments to suppliers are delayed)
- Decrease in accrued expenses → cash decreases (paying obligations sooner)
In the UAE’s fast-moving sectors, such as retail and logistics, delayed customer payments or excess inventory can create short-term liquidity crunches. Monitoring working capital ensures the CFO reflects real-time financial health.
Adjusting for working capital ensures that cash flow reporting aligns with actual business realities.
These components form the backbone of a company’s operating cash flow. UAE businesses that track each category precisely can better forecast spending, avoid liquidity shortfalls, and comply with regional financial regulations.
Alaan can help finance teams automate this tracking in real-time, linking receipts, approvals, and cash movement seamlessly, ensuring every dirham is accounted for.
Methods to Calculate Cash Flow from Operating Activities
Cash flow from operating activities (CFO) can be calculated using two standard methods: the direct method and the indirect method. Both methods aim to reveal the cash generated by a company’s core operations, but they approach the calculation differently.
For UAE-based businesses preparing financial reports or investor decks, selecting the right method depends on the level of detail required and the accounting framework used. Below is a breakdown of each approach.
1. Indirect Method
The indirect method is the more commonly used approach, especially by companies in the UAE that follow International Financial Reporting Standards (IFRS). This method begins with net income and adjusts it to reflect actual cash activity.
Key steps in the indirect method include:
- Adding back non-cash expenses like depreciation and amortisation.
- Adjusting for gains or losses on asset sales that are not cash-based.
- Incorporating changes in working capital, such as:
- Increase in accounts receivable → reduce cash
- Increase in accounts payable → increase cash
- Increase in inventory → reduce cash
For example, if a Dubai-based retail firm reports AED 500,000 in net income, adds AED 50,000 in depreciation, and accounts for a AED 30,000 increase in inventory and a AED 20,000 decrease in receivables, the calculation would be:
CFO = 500,000 + 50,000 - 30,000 - 20,000 = AED 500,000
This method is preferred due to its simplicity and alignment with financial statements prepared under the accrual accounting method.
2.Direct Method
The direct method focuses on actual cash transactions during the period. It offers a clearer picture of cash movement but requires detailed tracking of individual cash inflows and outflows.
Key components of the direct method include:
- Cash received from customers for product or service sales.
- Cash paid to suppliers and vendors for inventory or services.
- Wages and salaries paid to employees.
- Taxes and interest paid to government authorities.
Example: A logistics firm in Abu Dhabi receives AED 800,000 in customer payments, pays AED 300,000 to suppliers, and AED 200,000 in salaries. Its cash flow from operations would be:
CFO = 800,000 - 300,000 - 200,000 = AED 300,000
Despite offering more transparency, the direct method is used less frequently in the UAE due to the additional reconciliation requirement; companies must also present an indirect-style adjustment report in conjunction with the direct calculation.
Businesses often avoid the direct method unless mandated, as it increases reporting effort without impacting the final CFO amount.
Both methods will arrive at the same cash flow figure when applied correctly. However, most UAE businesses prefer the indirect method due to its ease of use and consistency with IFRS-based reporting.
Alaan’s real-time expense tracking and accounting integrations can simplify both approaches. With automated data capture, reconciliation, and reporting, finance teams can generate accurate cash flow statements, whichever method they choose.
Also Read: Effective Retail Cash Flow Management Strategies
Formulas to Calculate Cash Flow from Operating Activities
Businesses in the UAE often rely on standardised formulas to calculate operating cash flow, based on their reporting preference. Both methods provide clear frameworks for measuring the actual cash generated from day-to-day operations.
Indirect Method Formula
UAE-based businesses widely use the indirect method as it aligns with IFRS accounting, which is mandatory for most entities in the region. This method starts with net income and adjusts it for non-cash items and changes in working capital.
Formula:
Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital
Here’s what each component means:
- Net Income: Profit earned during the period, taken directly from the income statement.
- Non-Cash Expenses: These are accounting adjustments that reduce reported profit but do not affect cash:
- Depreciation
- Amortisation
- Impairment losses
- Deferred tax provisions
- Changes in Working Capital: Adjustments that reflect operational cash movement:
- Increase in receivables = outflow
- Increase in payables = inflow
- Change in inventory = outflow or inflow based on the direction
This method is preferred by finance teams in the UAE due to its simplicity and compatibility with existing income statements and balance sheets prepared under the accrual accounting method.
Direct Method Formula
The direct method tracks actual cash inflows and outflows from core operations. Though it offers a more detailed view, it’s less common in practice due to the need for transaction-level data.
Formula:
Operating Cash Flow = Cash Received from Customers − Cash Paid for Operating Expenses
Each part explained:
- Cash Received from Customers: Total cash collected during the period through sales or services rendered.
- Cash Paid for Operating Expenses: Direct payments such as:
- Salaries and wages
- Rent and utilities
- Payments to suppliers and vendors
- VAT remittances
- Insurance premiums
The direct method is preferred for its transparency, but it requires robust data capture tools. Alaan’s real-time expense tracking and transaction visibility can help UAE businesses adopt this method more efficiently.
While both formulas arrive at the same OCF value, the choice between them depends on available data, reporting needs, and business preferences. Most UAE entities adopt the indirect method, but tools like Alaan make it easier to implement direct cash flow tracking for sharper financial insights.
Examples of Operating Cash Flow Calculations
To fully understand how operating cash flow (OCF) is calculated, it is helpful to examine real-world examples. Below are two simplified scenarios that illustrate how the indirect and direct methods are applied in business environments, particularly relevant to small and medium-sized enterprises (SMEs) and startups in the UAE.
Example 1: UAE-Based Retail Business (Indirect Method)
The indirect method begins with net income and then adjusts for non-cash items and changes in working capital.
Assume the following financials for a local retail company in Dubai:
- Net income: AED 200,000
- Depreciation expense: AED 40,000
- Increase in accounts receivable: AED 20,000
- Increase in accounts payable: AED 30,000
Step-by-step calculation:
Step 1: Start with net income: AED 200,000
Step 2: Add back non-cash depreciation: + AED 40,000
Step 3: Subtract increase in receivables: – AED 20,000
Step 4: Add increase in payables: + AED 30,000
Operating Cash Flow = AED 250,000
This calculation illustrates how the indirect method provides a clearer picture of cash flow by accounting for non-cash and working capital movements. For UAE retailers facing delayed customer payments or supplier terms, these adjustments are crucial for understanding their actual liquidity.
Example 2: UAE-Based Service Company (Direct Method)
The direct method calculates OCF by summing all actual cash inflows and deducting operational cash outflows. Although less commonly used, it provides a transparent view of how money flows through the business.
Assume the following for a professional services firm in Abu Dhabi:
- Cash received from clients: AED 500,000
- Salaries paid: AED 150,000
- Rent and utilities: AED 50,000
- Payments to suppliers: AED 100,000
Step-by-step calculation:
Step 1: Total cash inflows: AED 500,000
Step 2: Total cash outflows: AED 150,000 + AED 50,000 + AED 100,000 = AED 300,000
Operating Cash Flow = AED 500,000 – AED 300,000 = AED 200,000
This example highlights the simplicity and transparency of the direct method. For UAE startups and SMEs utilising digital payment solutions or real-time expense tools, this method can provide quicker insights into their financial health.
Both the indirect and direct methods ultimately arrive at the same OCF number. However, they offer different insights depending on the structure of your accounting and the detail you require. UAE businesses, particularly those expanding into e-commerce, services, or trading, should select the method that best aligns with their financial reporting and management objectives.
Why Cash Flow from Operating Activities Is Important?
Cash flow from operating activities is more than just a financial metric. It’s a real-time indicator of business resilience and sustainability. For UAE-based companies managing high growth, supplier contracts, and VAT obligations, understanding this cash flow stream can have a direct impact on stability and long-term success.
- Liquidity Management
A healthy CFO shows that a business can fund day-to-day operations without relying on external loans or capital injections. This is especially important in the UAE, where delayed payments and lengthy credit cycles are common in sectors such as construction, trade, and healthcare.
Why it matters:
- Ensures payroll, vendor payments, and utility bills are met on time.
- Reduces dependence on short-term bank facilities or credit lines.
- Helps maintain trust with stakeholders.
Strong operating cash flow safeguards business continuity and reduces financial stress during uncertain cycles.
- Operational Efficiency
CFO reflects how efficiently a company converts sales into real cash. In sectors such as logistics, e-commerce, or professional services, consistent positive CFO signals indicate that receivables are being collected quickly and expenses are being well-controlled.
Key indicators of efficiency include:
- Timely customer collections and billing cycles.
- Controlled inventory and supply chain expenses.
- Reduced reliance on deferred or accrued liabilities.
Tracking CFO helps UAE businesses diagnose operational bottlenecks early and maintain working capital discipline.
- Investment Readiness
Investors, banks, and government funds often assess operating cash flow before approving loans or equity injections. A strong CFO builds confidence that the business can generate cash independently and meet repayment obligations.
Why investors monitor the CFO:
- It shows how much cash is truly available to fund growth.
- It reduces risk perception for credit and investment approvals.
- It supports better business valuations during M&A or fundraising.
In the UAE’s competitive financing landscape, a healthy CFO can unlock faster access to capital and partnerships.
- VAT and Tax Compliance
In the UAE, accurate and timely VAT submissions are mandatory. CFO helps ensure there is enough cash available to remit VAT on eligible transactions, especially for firms with high monthly volumes.
CFO supports compliance through:
- Clear visibility into taxable revenue and input VAT claims.
- Timely cash availability to meet FTA filing deadlines.
- Reduced risk of penalties or compliance gaps.
Tracking CFO supports accurate VAT reporting and tax planning, which is critical in a regulated environment like the UAE.
For UAE businesses, especially those navigating rapid expansion or sector-specific challenges, cash flow from operating activities is a decision-making tool. It helps leaders plan growth, secure funding, avoid regulatory issues, and operate with greater confidence.
Alaan’s real-time expense tracking and card-based controls can make this visibility seamless and actionable.
Also Read: How to Solve Cash Flow Issues in Business: Practical Strategies in UAE Businesses
Take Control of Operating Cash Flows with Alaan
Managing day-to-day expenses across teams, departments, and cost centres can quickly drain time and obscure cash visibility. Alaan solves this challenge for UAE finance leaders.
Alaan is an AI-powered spend management platform that offers real-time visibility into every dirham spent, helping you manage operating cash flows with precision. With smart corporate cards, automated workflows, and seamless ERP integrations, your finance team can forecast liquidity accurately, without chasing receipts or reconciling spreadsheets.
Here’s how Alaan helps you stay in control:
- Real-time expense tracking: Every transaction made using an Alaan corporate card is logged instantly. Monitor live spend across teams, vendors, and cost centres to improve cash flow visibility.
- Smart corporate cards with spend controls: Issue corporate cards instantly and apply role-based spend limits, merchant restrictions, and approval flows. Ideal for fast-paced UAE businesses that require financial control without bottlenecks.
- Automated receipt verification: Employees upload receipts directly in the app. Alaan Intelligence extracts vendor names, VAT amounts, and invoice dates, matching them with transactions and flagging errors, with no manual input needed.
- Built-in VAT compliance: Alaan ensures every uploaded receipt meets UAE FTA guidelines. The platform extracts TRN details and helps finance teams maximise VAT claims confidently and accurately.
- Accounting automation: Alaan integrates with popular tools such as Xero, QuickBooks, NetSuite, and Microsoft Dynamics. All transactions are synced in real-time, ensuring your books are accurate and your reconciliation workflows are automated.
- Forecasting made simple: With all inflows and outflows tracked centrally, CFOs can project cash availability for payroll, VAT filings, and supplier payments without relying on guesswork.
From UAE-based startups scaling rapidly to enterprises managing multiple teams and recurring vendor payments, Alaan equips businesses to stay cash-positive, compliant, and in control.
Final Thoughts
Cash flow from operating activities is a critical indicator of financial stability. For UAE businesses, particularly those managing VAT compliance, supplier payments, and distributed teams, real-time visibility into operating cash flow is crucial for informed decision-making and sustainable growth.
Alaan helps finance teams in the UAE move beyond spreadsheets and manual tracking. With smart corporate cards, AI-powered automation, and seamless integrations, businesses can gain instant clarity on spending, ensure VAT compliance, and close books faster.
Ready to take control of your cash flow? Book a demo with Alaan today and transform the way your business manages money.
FAQs
Q. Can a company have strong profits but weak operating cash flow?
A. Yes. A company may show high net profits on paper but still struggle with cash flow if sales are made on credit and collections are delayed. This is common in UAE sectors such as construction or wholesale trading, where payment cycles are long and receivables can take months to clear.
Q. How does delayed VAT refund processing affect cash flow in the UAE?
A. Delayed VAT refunds can create temporary cash shortfalls, especially for businesses that frequently make zero-rated or export sales. This means that funds are tied up for a longer period, reducing liquidity. Tracking cash flow from operations helps identify such lags early and plan reserves accordingly.
Q. Should startups calculate cash flow from operations even if they are pre-revenue?
A. Yes. Even pre-revenue startups in the UAE benefit from having a CFO to track cash burn, understand operational outflows, and manage runway. It helps them stay investment-ready and prepare for VAT compliance once sales begin.
Q. How often should operating cash flow be reviewed?
A. Finance teams should review the CFO monthly, not just quarterly. In the UAE, where expense cycles (e.g., payroll via WPS, VAT filing deadlines) are monthly, regular reviews ensure better liquidity planning and help avoid surprises during tax submissions or supplier settlements.
Q. Can automating expense tracking improve cash flow reporting accuracy?
A. Absolutely. Automated platforms like Alaan eliminate manual errors, enforce real-time tracking, and instantly match receipts to transactions. This not only improves CFO accuracy but also simplifies audit trails and VAT compliance for UAE-based finance teams.
