Operating Cash Flow

Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and expand its operations, or whether it otherwise requires external financing for capital expansion.

• Operating cash flow is an important benchmark for determining the financial success of a company's core business activities.
• Operating cash flow is the first section of a cash flow statement, which also includes funds from investing and financing activities.
• There are two methods for presenting operating cash flow in a cash flow statement: the indirect method and the direct method.
  • The indirect method starts with net income from the income statement and then adds back non-cash items to arrive at a cash basis figure.
  • The direct method tracks all transactions in a period on a cash basis and uses the actual cash inflows and outflows in the cash flow statement.

Calculating Operating Cash Flow

Indirect Cash Flow

When calculating indirect cash flow, all cash-effective items must be removed from net income.

Operating Cash Flow =
+ Net Income
+ Non-cash expenses – (Depreciation, increase in reserves & provisions, reduction in finished and unfinished goods inventory, extraordinary expenses)**
– Non-cash revenues** (Receipts from sales, collection of receivables, other receipts)

Direct Cash Flow

With the direct cash flow method, all cash-effective operating revenues and operating expenses are offset against each other.

Operating Cash Flow =

+ Cash-effective revenues (Receipts from sales, collection of receivables, other receipts)
– Cash-effective expenses (Personnel expenses, payment of liabilities, expenses for materials & goods, other disbursements)

TIP: Learn more in our article Calculating Cash Flow