What is operating cash flow?
OCF (or cash flow from operating activities) focuses on cash from selling goods and services, after paying suppliers, staff, rent and taxes. It excludes investing activities (such as buying equipment) and financing activities (such as loans and [dividends](/glossary/dividend)).
Indirect method formula
OCF = [Net income](/glossary/net-income) + Non-cash expenses (depreciation, amortization) ± Changes in [working capital](/glossary/working-capital)
- Increase in receivables or inventory → reduces OCF
- Increase in payables or deferred revenue → increases OCF
Example
Net income $90,000 + depreciation $25,000 − increase in receivables $30,000 − increase in inventory $10,000 + increase in payables $12,000 = OCF of $87,000.
Why it matters
- Positive OCF means the business funds itself from trading.
- Persistently negative OCF while reporting profits can signal collection problems or aggressive revenue recognition.
- OCF minus [capital expenditure](/glossary/capital-expenditure) gives [free cash flow](/glossary/free-cash-flow).
Useful ratios
- Operating cash flow ratio = OCF ÷ Current liabilities
- Cash conversion = OCF ÷ Net income (above 1 is generally healthy)