Operating Cash Flow

Meaning of Operating Cash Flow

Operating Cash Flow (OCF) is a metric used to test the company’s cash inflow through business. It shows how well a company can produce positive cash flow to support its own business operations. The usage of operating cash flow focuses on the maintenance and growth of the core business activities.

For example, manufacturing companies constantly need repairs and upgrades in machinery and technology to become more efficient and maximize their output.

Description of Operating Cash Flow

Operating Cash Flow

As seen in the annual or quarterly Cash Flow Statement of a company, the metric operating cash flow can be described as the cash version of net income. Working capital (current assets minus current liabilities) such as short-term debt accounts receivable and payable and changes in inventory are a part of Cash flow from operating activities. The income generated from activities other than core business is noted separately.

The accountants, investors, and members of a company can compare the Operating Cash Flow with the EBITDA to understand its ability to finance short-term capital. Investors can find out where exactly a company earns from by separating the operating cash from the cash flow from investments and financing activities, respectively.

A positive operating cash flow is favorable as it signals that a company is using its cash resources well. Without a positive OCF, a company may need to borrow funds from outsiders or even wind up the business in extreme cases. But having a negative Operating cash flow is not always something to worry about. In cases where a company possesses negative cash flow because it is underway a new plant construction, then it may earn returns with the future operations of the new plant.

Operating Cash Flow Formula

The Operating Cash Flow is calculated using the formula as shown below:

Operating Cash Flow = EBIT (+/–) Changes in Working Capital + Depreciation (non-cash expenses) – Taxes


Changes in Working Capital = Current Assets – Current Liabilities


Consider the Extract of the Cash Flow Statement of Company XYZ for the year 2016-2017 as given below:

(All figures mentioned are in Million of USD)

ParticularsYear 2015-16Year 2016-17
(A) Cash Flow from Operating Activities 
Add: Depreciation100100
Less: Tax (30% of EBIT)(300)(450)
Net Cash Generated from Operating Activities$800$1150


Operating cash flow matters because a positive metric helps the company expand its operations, develop new technologies and products, increase its yield and productivity, reduce debts and even buy back stocks. Dividend payments are affected by cash flow, as it determines the ability to pay. Hence, investors value operating cash flow and look for companies with a high or improving operating cash flow but a low per share rate. This trend often means that the company’s share price will increase soon in the near future.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

4 thoughts on “Operating Cash Flow”

  1. I think that when we grow a business, we must know what is operating cash flow and how to compute or what is the formula for it. This article is very helpful. Thanks for sharing this article.

  2. Thanks for sharing the formula for Operating Cash Flow. This will definitely help me to do my business accounting. This article is very informative.

  3. This is a very interesting article. I think that I will be able to manage my cashflow with the help of this article. Thanks for sharing this article. I will do what you said here to avoid issue in my business accounting.

  4. I think that it’s very important for me to know operating cashflow. This article is very helpful for me to manage my finances well and do my business accounting too. Thanks for sharing this article.


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