Operating cash flows

Key Takeaways

  1. Operating cash flow estimates how much cash flow is made by the company’s normal functioning.
  2. Operating cash flow is the difference between total revenue generated minus operating expenses.
  3. Operating cash flow can be calculated by two methods: direct method and indirect method.
  4. Operating cash flow indicates the company’s performance and health.

Operating cash flow is the cash that flows in and out due to the daily operations of a company that generate revenues, sell inventory, provide services, and other activities not classified as investing or financing cash flow.


Cash sales, collection of credit sales contribute to operating cash inflows. Cash receipts from the provision of services, royalties, and commissions are included in operating cash inflows.

Operating cash outflows include cash payments for purchasing raw materials from suppliers for manufacturing s, payment of salaries to employees, taxes and other operations-related expenses and accounts payable.

The financial impact of a company’s net income (NI) from its main business operations is represented by operating cash flow. The first portion of the cash flow statement is titled operating cash flow, which is sometimes referred to as cash flow from operating operations.

Cash receipts and payments from trading in securities are also part of operational cash flow.

Below is a pictorial illustration of how operating cash flows may look in the cash flow statement of the company:-

(for illustrative purposes only)

Source: Tavaga

What is operating cash flow? About operating cash flow

Operating cash flow is one of the most influential figures in the company’s accounts. Many shareholders or investors pay great attention to operating cash flow as it gives vital clues to an investor, who is trying to determine the health and performance of the business. In simpler terms, operating cash flow is the amount of cash generated from a company’s regular operations. It estimates how much cash flow is made by the company’s normal functioning. For example, the retail stores earn their operating cash flow from the difference between the sale price of an item and how much it cost them to sell it. The operating cash flow and EBITDA shares a lot of similarities. The difference is due to the working capital. Operating cash flow may reveal false accounting. For example, if a company generates a considerable amount of profit, but has generated very little cash flow, this indicates that gains are not backed up by strong cash flow. Because of this, it gives a more realistic idea of the company’s health and performance. Most of the companies use their generated cash flow to expand their businesses.

So a company that is not generating enough cash flow has to look out for external financing like loans from banking institutions.

How to calculate operating cash flow?

Operating cash flow can be calculated by two methods: direct and indirect method

Direct Method – Direct method is much easier than indirect method. It’s only drawback is that it does not give investors detailed information about the company’s performance.

Formula: OCF = Total Revenue – Operating Expenses

Indirect Method

The Indirect method provides more information than the direct method. Non – cash expenses are mostly depreciation and amortization costs

Formula for operating cash flow:

OCF = Net Income + non-cash expenses + changes in working capital

Know more

Operating cash flow is a useful measure for fundamental analysis as it reveals the cash generated organically by the enterprise from its core business (and not borrowed from other sources). The more positive operating cash flow (inflow greater than outflow), the higher the valuation of the company