Operating cash flow is calculated by taking net income, adding back non-cash expenses (depreciation, amortization), and adjusting for changes in working capital (accounts receivable, inventory, accounts payable). A positive number means your core operations generate cash.
Key Moves
- Formula: Net Income + Non-Cash Expenses + Changes in Working Capital
- Non-cash expenses include depreciation and amortization
- Increase in accounts receivable reduces cash flow (customers owe more)
- Increase in accounts payable increases cash flow (you owe more)
- Positive operating cash flow = sustainable business model
See a cash flow statement and Cash Flow Calculator for more on this.
Frequently Asked Questions
Why add back depreciation if it's an expense?
Depreciation reduces net income but doesn't involve actual cash leaving your business. It's a non-cash expense.
What's a good operating cash flow ratio?
Operating cash flow divided by current liabilities should be 1.0 or higher. Below 0.8 signals potential liquidity problems.
Can operating cash flow be negative?
Yes, temporarily during growth or investment phases. Persistent negative operating cash flow means the business isn't sustainable without external funding.