Cash flow represents the movement of funds into and out of your business (see our article). But there are many types of cash flow—you may have heard of free cash flow, cash flow from investing, and more. In this article, we will cover one of these line items in your company finances: operating cash flow. Read on to learn what it is, how it’s calculated, and why it matters. 

What is operating cash flow? 

Abbreviated as OCF, operating cash flow is the amount of funds created by a company’s business operations. Having a positive cash flow can be an indicator as to whether the business can continue to operate and grow. Otherwise, the business may need to seek new strategies, external financing, or investments. 

Why does operating cash flow matter?

Overall, OCF can be used to test a business’ overall financial health and success. Note that OCF does not take into account any cash flow from investing or financing. Instead, it focuses on primary business activities like buying and selling products, buying inventory, spending on payroll, etc. 

How to calculate operating cash flow

There are two methods you can use to describe and calculate OCF according to the generally accepted accounting principles (GAAP). These options are known as the indirect or direct method. 

With the indirect method, the operating cashflow formula is: OCF = Net Income + Depreciation & Amortization – Increase in Net Working Capital 

With the direct method, the formula is: OCF = Cash revenue – Operating expenses paid in cash 

The indirect method uses non-cash line items like depreciation and amortization, whereas the direct method is simpler and only accounts for cash income and expenses.

What is the operating cash flow ratio?

The operating cash flow ratio is a number that shows whether a company can pay all of its debt with its existing cash inflow. If the ratio is greater than 1, then the company is in a good position. The ratio formula is: 

Operating cash flow ratio = Operating cash flow / Current liabilities

What are other types of cash flow? 

In addition to operating cash flow, there is cash flow from investing and cash flow from financing. The former—CFI—refers to how much your business has spent or earned through investing, including buying properties and other assets, participating in mergers and acquisitions, or investing in the market. Cash flow from financing, CFF, is how much your company generates in funding, including debts, equity, dividends, and other movements between owners and investors. Depending on the stage of your business, you may need to look into additional cash flow opportunities to help your business achieve profitability.

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