Operating Cash Flow (OCF): What It Is, Formula, and How to Calculate It

Understanding a company’s financial health goes beyond just revenue or profit. One of the most important metrics that businesses, investors, and finance teams rely on is Operating Cash Flow (OCF). Unlike net income, which includes many non-cash items, OCF gives a real picture of how much cash a business is actually generating from its core operations.

In this post, we’ll break down what OCF means, why it matters, and how you can calculate it using simple formulas.

💡 What Is Operating Cash Flow?

Operating Cash Flow (OCF) refers to the amount of cash generated or used by a company’s regular business activities—such as selling products, providing services, and managing day-to-day expenses.

In simple terms, it shows whether the business can sustain itself and grow without relying on external financing or one-time gains.

It’s the first section of the cash flow statement and focuses only on core operations—excluding cash from investments (like buying property or shares) or financing (like loans or issuing equity).

🧾 Why Is OCF Important?

• Shows liquidity: Can the business pay salaries, suppliers, and rent?
• Measures core performance: OCF strips out non-cash accounting tricks and focuses on real cash movement.
• Attracts investors and lenders: A strong OCF is a sign of a reliable, self-sustaining business.
• Helps with budgeting: OCF shows how much internal cash is available for reinvestment or saving.

🔢 Operating Cash Flow Formula

There are two main methods to calculate OCF: the direct method and the indirect method.

📘 1. Indirect Method (Most Common)

This method starts with net income (from the income statement) and adjusts it for non-cash expenses and changes in working capital.

OCF = Net Income + Non-Cash Expenses + Changes in Working Capital

Where:

• Non-Cash Expenses typically include depreciation and amortization
• Changes in Working Capital includes:
• Increase in current liabilities (adds cash)
• Increase in current assets (uses cash)

👉 Example:

Let’s say:

• Net Income = $100,000
• Depreciation = $20,000
• Increase in Accounts Receivable = $10,000 (uses cash)
• Increase in Accounts Payable = $5,000 (adds cash)

OCF = $100,000 + $20,000 - $10,000 + $5,000 = $115,000

So, this company generated $115,000 in operating cash from its core business during the period.

📗 2. Direct Method (Less Common)

This method calculates OCF by summing all actual cash inflows and outflows from operations.

OCF = Cash Received from Customers – Cash Paid for Operating Expenses

This includes:

• Cash collections from sales
• Payments to suppliers
• Employee wages
• Rent, utilities, and other direct costs

This method is straightforward but less frequently used, because it requires more detailed cash records.

📊 OCF vs. Net Income – Why the Difference?

A company may show high profits on paper (net income) but still have negative operating cash flow. Why?

• It may have large accounts receivable (sales made but not collected yet)
• It may have high inventory costs
• It might delay payments to suppliers to conserve cash

That’s why OCF is often considered a truer reflection of financial health than net income alone.

✅ What Is a Healthy OCF?

There’s no fixed “ideal” number, but generally:

• Positive OCF means your core business is generating enough cash to sustain and grow.
• Negative OCF isn’t always bad (e.g., during an early growth stage), but it should be temporary.

Key signs of a healthy OCF:

• Cash inflow consistently exceeds cash outflow from operations
• OCF trends are stable or improving over time
• OCF covers capital expenses, debt repayments, and dividends

🛠️ How to Use OCF in Business Planning

1. Budgeting and Forecasting

OCF helps businesses plan cash usage realistically. You can assess:

• How much can be reinvested in growth
• Whether you need external funding
• How much buffer is available during low-revenue months

2. Investor Communication

Strong OCF builds trust. It shows that your revenue isn't just accounting profits—it’s real money in the bank.

3. Debt Management

Banks and lenders often look at OCF to assess repayment ability. A healthy OCF makes borrowing easier and terms more favorable.

🌏 Why OCF Matters in Asia and the Arabic Regions

In many fast-growing markets, especially in Asia and the Arabic world, businesses are expanding quickly. With this growth comes the need to manage cash wisely, especially in:

• SMEs and startups aiming for self-sustainability
• Family-owned businesses preparing for digital transformation
• Regional firms looking to attract global investors

At GalleryHR, we work with organizations to ensure their HR, payroll, and financial structures align—so that people management and operational cash flow grow hand in hand.

🔍 Quick Recap

Concept	Summary
OCF Definition	Cash generated from core business activities
Main Formula (Indirect)	Net Income + Non-Cash Expenses + Changes in Working Capital
Used For	Assessing liquidity, planning, investor confidence
OCF vs Net Income	OCF shows real cash; net income includes non-cash elements
Healthy OCF	Consistently positive, stable or growing, supports business growth

📩 Final Thoughts

Operating Cash Flow isn’t just a finance department metric—it’s a powerful insight into how well your business is actually functioning day to day. Whether you’re a founder, HR leader, or business strategist, understanding and tracking OCF can help you make more confident, future-ready decisions.

At GalleryHR, we help organizations connect people and financial health—so you’re not just hiring and growing but doing it sustainably and strategically.

 

Don’t miss this opportunity to upgrade your HR operations and join the growing list of businesses in Sri Lanka achieving success with GalleryHR.

GalleryHR is committed to helping Sri Lankan businesses thrive with smarter, more efficient HR solutions. Partner with us today and experience the difference.

Join our empire today!