Operating Cash Flow (OCF)

What is OCF?

Operating cash flow (OCF) is the cash a company generates from its core business operations—producing and selling goods or services—over a reporting period. It excludes cash flows from investing (e.g., buying equipment) and financing (e.g., issuing debt or equity). OCF shows whether a company can fund day-to-day operations from its own activities.

Simple representation:
OCF = Net income + Non-cash expenses − Increase in working capital

Why OCF matters

• Measures operational health: Shows how well a company converts sales into cash.
• Indicates liquidity: Helps assess short-term ability to pay bills and obligations.
• Signals investment potential: Strong OCF supports reinvestment, dividends, or debt reduction.
• Assesses solvency: Companies with sustained positive OCF are better positioned to service debt.
• Tax and analysis relevance: OCF components affect taxable income and financial analysis.

The operating cash flow ratio (OCF ÷ current liabilities) gauges whether cash from operations can cover short-term liabilities; a ratio > 1.0 is generally favorable.

Components of OCF

Cash inflows
* Cash received from customers (cash sales and collections of receivables)
* Other operating receipts and reimbursements

Cash outflows
* Payments for inventory and raw materials
* Employee wages and benefits
* Operating expenses (rent, utilities, insurance)
* Taxes and other operating payments

Working capital effects
* Decrease in accounts receivable → increases OCF (customers paying faster)
* Increase in inventory → decreases OCF (cash tied up in stock)
* Increase in accounts payable → increases OCF (delaying supplier payments)
* Decrease in accrued expenses → decreases OCF (paying obligations sooner)

How OCF is calculated

There are two accepted methods; both should arrive at the same OCF.

Indirect method (most common)

Start with net income and adjust for non-cash items and changes in working capital.

Typical adjustments:
* Add back non-cash expenses (depreciation, amortization)
* Subtract increases in working capital (e.g., accounts receivable, inventory)
* Add increases in liabilities related to operations (e.g., accounts payable)
* Remove non-operating gains/losses

Basic formula:
OCF = Net income + Depreciation & Amortization − Change in net working capital

Example:
Net income $100M + Depreciation $150M − AR increase $50M − AP decrease $50M = OCF $150M

Direct method

Lists actual cash receipts and payments during the period.

Typical line items:
* Cash received from customers
* Cash paid to suppliers and employees
* Cash paid for interest and taxes

Basic formula:
OCF = Cash received from customers − Cash paid for operating expenses

Example:
Cash receipts $80M − Cash payments to suppliers $25M − Wages $10M = OCF $45M

Worked example (small retail business)

Given:
* Net income: $50,000
* Depreciation: $10,000
* Increase in accounts receivable: $5,000
* Increase in inventory: $3,000
* Increase in accounts payable: $8,000

Indirect-method calculation:
OCF = $50,000 + $10,000 − $5,000 − $3,000 + $8,000 = $60,000

Practical considerations

• A positive OCF indicates the business generates cash from operations; negative OCF may signal cash-strain even if accounting profits exist.
• OCF can fluctuate due to seasonality, working capital timing, or one-off items—look at trends, not a single period.
• Analysts often prefer OCF over net income for assessing sustainable cash generation, because net income includes non-cash and accrual-based items.

Bottom line

Operating cash flow isolates the cash generated by a company’s core activities and is a key indicator of liquidity, operational efficiency, and the ability to fund growth or meet obligations without external financing. Evaluate OCF alongside other financial metrics and across multiple periods for a reliable view of operational cash performance.