Operating Cash Flow Calculator
Calculate cash flow from your business operations
Table of Contents
How to Use
- Enter your net income for the period
- Add depreciation expenses (non-cash expense)
- Add amortization expenses (non-cash expense)
- Enter changes in working capital (positive for decrease, negative for increase)
- Add other non-cash items if applicable
- Click calculate to see your operating cash flow
What is Operating Cash Flow?
Operating Cash Flow (OCF) is the amount of cash generated by a company's normal business operations. It shows whether a company can generate sufficient positive cash flow to maintain and grow its operations, or whether it may need external financing.
OCF is a better measure of a company's financial health than net income because it's harder to manipulate. While net income includes non-cash expenses and can be affected by accounting methods, cash flow represents actual cash movements.
How to Calculate Operating Cash Flow
The indirect method formula for operating cash flow is:
OCF = Net Income + Non-Cash Expenses - Changes in Working Capital
- Start with Net Income from the income statement
- Add back non-cash expenses (depreciation, amortization)
- Subtract increases in working capital (or add decreases)
- Add other non-cash items affecting net income
- The result is your operating cash flow
Key Components
Understanding each component:
- Net Income: Profit after all expenses and taxes
- Depreciation: Non-cash expense for tangible asset decline
- Amortization: Non-cash expense for intangible asset decline
- Working Capital Changes: Cash tied up in operations (inventory, receivables, payables)
- Other Non-Cash Items: Stock-based compensation, deferred taxes, etc.
Why Operating Cash Flow Matters
Operating cash flow is crucial because it:
- Shows the company's ability to generate cash from operations
- Indicates whether the business can sustain itself without external funding
- Helps evaluate dividend sustainability and growth potential
- Is harder to manipulate than accounting profits
- Provides insights into operational efficiency
- Is essential for valuation and investment decisions
Frequently Asked Questions
- What's the difference between operating cash flow and net income?
- Net income is an accounting measure that includes non-cash expenses and follows accrual accounting. Operating cash flow shows actual cash generated from operations. A company can have positive net income but negative cash flow if receivables increase or inventory builds up.
- Is positive operating cash flow always good?
- Generally yes, but context matters. Positive OCF means the business generates cash from operations. However, very high OCF might indicate underinvestment in growth. Compare OCF to industry benchmarks and consider the company's growth stage.
- How does working capital affect operating cash flow?
- Increases in working capital (more inventory, receivables) use cash and reduce OCF. Decreases in working capital (collecting receivables, reducing inventory) free up cash and increase OCF. This is why growing businesses often have lower OCF despite profitability.
- What's a good operating cash flow margin?
- OCF margin (OCF/Revenue) varies by industry. Generally, 10-20% is considered healthy for most businesses. Higher is better, but compare to industry peers. A margin consistently above net income margin indicates strong cash generation.