Operating cash flow (OCF): What it is, formula, and how to calculate it

You had a great quarter. Sales are up, you’re swimming in glowing testimonials, and your income statement shows a healthy profit. Time to celebrate? Maybe, but before you pop the champagne (or sign the lease on a new location), check your operating cash flow. This is the number that tells you whether you’re financially solid or just look that way on paper. It’s the reality check that helps you make cash-smart decisions.

In this guide, we’ll break down how to find your operating cash flow, explain why it matters, and show you how to use it to make better decisions.

What is operating cash flow?

Operating cash flow (OCF) is the money your business makes from selling goods or providing services—the actual business of your business. You’ll typically find it in a company’s cash flow statement. It’s the first major section, and it breaks down how much real cash the business brings in from the company’s core activities before considering any investing activities or financing activities.

It’s also one of the clearest ways to see whether, without outside help, your business can afford to keep going. Unlike net income, which can be influenced by accounting rules or one-time events, OCF filters them out to show how much real money from operational activities moved in and out of the business during a specific period. It’s a more useful number for judging short-term liquidity.

Example: Jamie is reviewing the books for WidgetsIO, a software startup. The income statement shows a profit, but the operating cash flow on the cash flow statement is negative. Generous billing terms have created a gap between revenue and cash. Jamie flags the issue for the CFO as a liquidity problem that might impact upcoming plans to scale.

7 key components of operating cash flow statements

When you’re calculating cash flow from operations, the goal is simple: figure out how much cash your business brought in and spent just from running itself. While you won’t find all of the items below in every operating cash flow formula, you’re likely to encounter each of them at least once. Some come straight from the income statement. Others reflect what’s happening behind the scenes, like working capital and actual cash movement.

Net income

Most operating cash flow calculations start with net income. This number reflects your accounting profit after all revenues and expenses. It’s how profitable your business looks on paper. But it still includes accounting noise like unpaid invoices, depreciation, and one-time gains,  which means it can’t show you how much cash the business really brought in. Not sure what counts towards the total? Remember the difference between net profit vs. gross profit. Only net profit after expenses should feed into your OCF calculation.

Non-cash expenses

Non-cash expenses reduce your profit but don’t touch your cash, and include things like depreciation of equipment or amortization of software. They’re accounting adjustments, not actual outflows. That’s why you add them back when you’re looking purely at cash movement.

Changes in working capital

Working capital reflects the cash that moves through your business every day as part of regular processes. Think of inventory, receivables, and payables. If you have a lot of money tied up in unpaid invoices or unsold stock, for example, that’s money you don’t have on hand in cash. If, on the other hand, you held off on paying a bill, you’ll hold that cash in the bank a little longer.

Cash receipts from customers

Cash receipts indicate money in your bank account that you received from customers during a given period. It’s one of the most direct signals of how much cash you made from sales activities, but be careful not to confuse it with amounts you invoiced. 

Cash payments to suppliers and employees

Cash payments to suppliers and employees are the outflows that keep the lights on and your team signing on every day. They include overheads like rent, payroll, raw materials, and utilities, and they happen whether or not you’ve received payments from customers.

Other operating income and expenses

Other operating income and expenses can work as a catchall to capture cash that doesn’t fit neatly into sales or core expenses. Things like refunds, settlements, or insurance payouts. They don’t always crop up, but when they do, they form part of the cash picture. 

Interest and taxes paid

Interest and taxes paid count as operating expenses under GAAP, so you’ll include them in your calculation even though they aren’t directly related to selling a product or delivering a service. They also show up in net income, which is the foundation of your OCF formula.

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Operating cash flow formula

To find your operating cash flow—the cash your business brings in from its regular operations—you’ll likely apply a version of this formula:

OCF = net income + non-cash expenses ± changes in working capital ± non-operating gains and losses

You can apply this formula in two ways: the indirect method, which adjusts your net income to match actual cash activity, or the direct method, which looks only at cash coming in and going out of your bank account.

Indirect method

The indirect method pulls from your accounting statements and then peels away specific categories of inflows and outflows, like non-cash expenses, working capital, and one-time gains or losses, until you’re only looking at cash. That’s why it’s called the indirect method. You’re arriving at cash flow indirectly, by way of the numbers calculated using accrual formulas.

Most accounting systems rely on accrual data rather than cash movement, which makes the indirect method easier to work with for businesses using accrual accounting. It also meets GAAP and IFRS reporting requirements. 

Direct method

The direct method calculates operating cash flow by adding up all the actual cash transactions related to your operating activities. Instead of working from net income, you’ll list out cash received from customers, then subtract cash paid to suppliers, cash paid to employees, cash paid for interest and taxes, and other operations-related cash payments. 

The direct method can be a more straightforward way to visualize your inflows and outflows, but it’s actually harder to prepare. Accounting systems typically don’t track cash movement at that level of detail, which can make the underlying data difficult to source. Some businesses do use it internally for forecasting or liquidity planning, however, especially when the timing of specific payments or receivables matters.

How do you calculate cash flow from operations?

To calculate cash flow from operations, you start with net income, then adjust for the things that impact your cash, but not your profit. 

Most businesses apply the indirect method because it pulls directly from financial documents you’re already required to prepare, like an income statement and balance sheet. This makes it more efficient in practice, but does require you to do some mathematical legwork to make sure you’re cutting out non-cash inflows and outflows to get a realistic view of what you make from operating activities alone. 

New to reading financial reports? Start with a profit and loss example first. This will give you an understanding of how income and expenses are laid out before you tackle cash flow adjustments.

Step 1. Start with net income

If you’re applying the indirect method, you’ll use net income as your starting point. From here, the goal is to gradually strip out anything that doesn’t directly relate to your cash flow from core operations activities.

Not sure where to find net income? A good financial statement template can help you organize the core documents and information, like your income statement and balance sheet, that feed into the operating cash flow formula.

Step 2. Add back non-cash expenses

Next, you’ll add back any non-cash expenses like depreciation and amortization. These reduce your net income on paper, but they don’t actually use up cash, so you need to keep them in the mix. This step helps convert your accrual-based profit into a cash-based number that better reflects operational results.

Step 3. Adjust for changes in working capital

Now, you need to account for changes in working capital, specifically charges in current assets and current liabilities that connect to your day-to-day operations. These changes impact how much you have available to spend, but they don’t always appear on the income statement. Increases in assets like inventory or receivables use cash, while increases in liabilities like payables free it up.

Step 4. Subtract gains and add losses from non-operating activities

Your last adjustment eliminates any one-time gains or losses not tied to core operations. These are usually byproducts of investing activities like selling equipment or property. You need these for an accurate net income for the total business, but they don’t connect to cash earned from running it, so they don’t have a role to play in the OCF formula.

Step 5. Review other operating adjustments

Depending on the size or complexity of your business, you may need to consider other adjustments beyond the basics. Do you defer any taxes? Do you offer stock-based compensation? What about gains and losses in foreign currencies? These won’t always apply, but if they show up on your balance sheet, be sure to add them back or subtract them.

Step 6. Verify with the statement of cash flows

Now that you’ve made all the adjustments, you can total everything up for a clear picture of how much cash your business generated from providing services or selling goods, regardless of accounting rules, timing, or one-time gains and losses.

Once you’ve completed the calculation, consider cross-checking the result against the business’s cash flow statement. This report should include the “official” OFC reported to investors, regulators, or lenders. Look for “cash flows from operating activities.” If the numbers don’t match, you may have miscalculated your adjustments or skipped relevant line items.

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Real-world operating cash flow example

It’s one thing to talk about the concept in theory, but if you really want to understand how to calculate operating cash flow, you need to see the numbers in action. Below, we’ll walk through a real example based on the indirect method used by most businesses. 

Step 1. Begin with net income

Morgan, a finance analyst at Acme Co., needs to calculate OCF for the most recent quarter. They pull the company’s income statement and see that revenue and expenses net out to $100,000 in profit after accounting for non-cash expenses like depreciation and income from non-operating sources, like interest.

Net income = $100,000

Step 2. Add back non-cash expenses

Morgan checks the notes on Acme Co.’s income statement and finds $20,000 in depreciation and $5,000 in amortization for the quarter. Since these items don’t involve any cash actually leaving the business, Morgan adds them back.

Net income + non-cash expenses

$100,00 + $20,000 + $5,000 = $125,000

Step 3. Adjust for changes in working capital

Morgan reviews Acme Co.’s balance sheet and sees that the company’s accounts receivable increased by $10,000 from sales on credit, which means Acme Co. hasn’t collected the cash yet.  Inventory rose by $5,000, tying up more company cash in goods that have yet to sell. Accounts payable also went up by $8,000 when the company decided to delay certain payments. Taken together, those factors translate into a net working capital adjustment of -$7,000 (-$10,000 + $5,000 - $8,000). 

Net income + non-cash expenses - working capital adjustment

$125,000 - (-$10,000 + $5,000 - $8,000)

Step 4. Subtract non-operating gains or add losses

Morgan sees that Acme Co. recorded a $3,000 net gain on the sale of old equipment. The company did receive cash in payment, but the gain came from selling a fixed asset, not goods or services, so Morgan subtracts it from the total. 

Net income + non-cash expenses - working capital adjustment - non-operating gains and losses

[$125,000 - (-$10,000 + $5,000 - $8,000)] - $3,000

Step 5. Calculate total operating cash flow

Morgan begins with Acme Co.’s net income of $100,000, adds back $25,000 of non-cash expenses, subtracts $7,000 in working capital changes, then subtracts another $3,000 in non-operating gains to arrive at a final operating cash flow of $115,000.

Net income + non-cash expenses - working capital adjustment - non-operating gains and losses

[$125,000 - (-$10,000 + $5,000 - $8,000)] - $3,000 = $115,000

Operating cash flow vs net income vs free cash flow

Operating cash flow, net income, and free cash flow all help you understand your business’s financial health, but from different angles. 

Net income is the bottom line on your income statement. It shows what your business has left over after accounting for all expenses, including interest, taxes, and non-cash items like depreciation. Because it’s based on accrual accounting rules, however, it doesn’t always reflect what’s in the bank account. It’s helpful for investors who want to track long-term profitability, but it doesn’t accurately answer questions like, “Can we pay all the bills this month?” For that, you need to look at operating cash flow.

Operating cash flow follows a similar process as net income, but doesn’t look at anything other than cash inflows and outflows, accounts receivable, and accounts payable. If your business shows a consistently positive OCF, that’s a solid indicator that your business is healthy at its core. Finance teams and business leaders typically track this number closely as a performance indicator.

Free cash flow shows you exactly how much hard cash you have to work with. It builds on OCF, but removes capital expenditures. It’s useful for CFOs and investors who want to understand whether your business can actually afford to take certain steps, like pay down debt or start hiring.

Example: Casey works in the finance team at Midsize, Inc. The CEO wants to know if the company can afford to expand the sales team, so Casey pulls the latest financial statements. Last quarter, the company recorded net income of $2 million, but when Casey checks the cash flow statement, the operating cash flow is just $400,000. A few big clients still have invoices outstanding, and Midsize prepaid some key suppliers to lock in lower rates. Midsize also spent $250,000 on new servers, which leaves only $150,000 in free cash flow. Casey brings all three numbers to the CEO to explain that now might not be the right time to place job postings. 

Simplify financial reporting with Rippling

Accurate operating cash flow starts with clean, reliable financial data that works together. While most expense management software can save companies time and simplify the employee reimbursement process, they typically aren’t connected with the rest of your company’s finance systems. 

In Rippling, you can manage all of your company spend—expense reimbursements alongside vendor bills, payroll, and corporate cards—together on one intuitive platform. This gives companies unprecedented control and visibility over spend. With Rippling’s spend management software, you can create customizable reports, approval chains, and policy enforcements—all on an intuitive platform.

Since Rippling uses employee data to connect finance with the rest of your workforce management processes, company expense management policies will automatically apply to new employees as soon as they onboard and automatically adjust if they ever change roles.

With Rippling you can: 

• Automatically route expenses and bills to the right approver every time. 

• Flag out-of-policy spending with hyper-custom policies, like by vendor or value, for further review. 

• Close the books faster with AI-powered transaction categorization, and integration with your accounting systems.

FAQs about operating cash flow

What does operating cash flow tell you?

Operating cash flow tells you whether your business operations bring in cash. It strips our non-cash accounting entries and looks only at money coming in from clients or customers and money going out to suppliers, vendors, and employees. It’s similar, but not identical to, net income. Unlike net income, however, OFC isn’t influenced by depreciation or financing decisions, which means it gives you a more accurate view of your business’s short-term liquidity and operational strength.

What is the difference between FCF and OCF?

Operating cash flow (OCF) shows you how much cash your business generates from operating activities, before any capital spending. Free cash flow (FCF) goes a step further and takes into account major expenditures like equipment purchases or property. OFC helps you understand how efficiently the business runs on a day-to-day basis. FCF tells you how much cash you have left over after capital expenditures to pay down debt, invest, or distribute to your shareholders.

Is EBIT the same as operating cash flow?

No, EBIT isn’t the same as operating cash flow. Earnings Before Interest and Taxes (EBIT) shows what your company earned based on an accounting rule, not actual funds. Operating cash flow starts from EBIT or net income, but adjusts for non-cash factors like depreciation or changes to working capital, which gives you a more accurate picture of what your business actually generates from operations.

What is a good operating cash flow ratio?

A good operating cash flow ratio is generally 1.0 or higher, which means your business generates enough income from operations to cover its existing liabilities. If your ratio is greater than 1.0, that’s a sign of solid liquidity and good short-term financial health. A ratio below 1.0, on the other hand, could mean cash flow problems and raise concerns about your financial health, even if your balance sheet shows a profit. What qualifies as “good” can vary by industry, however, so it’s best viewed in context along with other indicators like your current ratio or free cash flow.