Operating Cash Flow
Operating cash flow (OCF) is the cash a company generates from its core, day-to-day business operations during a period. It strips out financing and investing activities to show whether the actual business produces enough cash to fund itself. Under the indirect method, OCF starts from net income, adds back non-cash charges such as depreciation, and adjusts for changes in working capital. It is the first section of the cash flow statement.
Worked example
Using the indirect method: net income is 50,000; depreciation (a non-cash expense) is 10,000; accounts receivable fell by 5,000 (cash in); inventory rose by 3,000 (cash out). OCF = 50,000 + 10,000 + 5,000 − 3,000 = 62,000. So the business generated 62,000 of cash from operations, well above its reported 50,000 of net income.
Why it matters
Operating cash flow matters because profit can be inflated by accounting choices, while cash is harder to fake — a company can report net income yet still run out of cash. Free cash flow is operating cash flow minus capital expenditure. The pitfall is reading OCF in isolation: a temporary squeeze on receivables or payables can flatter or depress it, so trends over several periods are more telling than a single quarter.
Frequently asked questions
What is the difference between operating cash flow and net income?
Net income is an accrual-based profit figure that includes non-cash items and timing effects, while operating cash flow tracks the actual cash moving through the business. A healthy company's operating cash flow usually exceeds or roughly matches net income over time.
What is the difference between the direct and indirect methods?
The direct method lists actual cash receipts and payments from operations, while the indirect method starts from net income and adjusts for non-cash items and working-capital changes. Both arrive at the same operating cash flow figure; the indirect method is far more common in practice.
Related terms: Free Cash Flow, Capital Expenditure (CapEx)