How To Calculate Operating Cash Flow

How to calculate the operating cash flow formula
  1. Operating cash flow = total cash received for sales – cash paid for operating expenses.
  2. OCF = (revenue – operating expenses) + depreciation – income taxes – change in working capital.
  3. OCF = net income + depreciation – change in working capital.

Operating cash flow (OCF) is a calculation that shows the revenue generated by a business after operational expenses like rent or the cost of producing or offering a product/service have been subtracted. In simpler terms, it’s the amount of cash flow produced by core business operations (i e. sales of a good or service) excluding additional revenue sources, such as investments

Chapter 2: Calculating Operating Cash Flows

Operating cash flow formula

Businesses can determine operating cash flow using one of two methods, each with corresponding formulas:

1. Direct method

The direct method is the most straightforward and accurate method, but GAAP requires a supporting reconciliation.

The following formula can be used to determine operating cash flow directly:

Operating cash flow = total revenue – operating expenses

2. Indirect method

Using changes to noncash accounts like depreciation, accounts payable, and accounts receivable, the indirect method converts net income to cash.

The indirect method formula is represented as follows:

Operating cash flow is calculated as net income (revenue minus cost of sales) plus depreciation, taxes, and any adjustments for working capital.

What is operating cash flow?

Negative operating cash flow may mean that a business needs to borrow money in order to pay its obligations, while positive operating cash flow ensures a company’s long-term solvency.

The focus remains on whether the company can cover costs associated with routine operations, allot funds for reinvesting in the business, pay off the company’s debts, and distribute dividends to shareholders because operating cash flow excludes financing and investment activities.

The operating cash flow calculation, which is a component of the cash flow statement, can give the best overall picture of the company’s core business operations and how they affect the company’s financial health. The operating cash flow calculation includes the following components:

Investors can be more aware of how a company can manipulate operating cash flow by delaying inventory orders, extending the payment terms on bills to keep their cash for longer, and shortening the payment terms on receivables to get cash faster by being aware of what goes into this calculation. To determine how accurate the most recent calculations are, it is therefore best to take a broad look at the company’s cash trends.

How to calculate operating cash flow

It can be overwhelming to create all the financial statements needed for a business, but as your company expands, it’s crucial to keep up with them. Most business owners who are diligent about monitoring daily costs and revenues can forecast their cash flows and confidently make better business decisions.

The indirect method, which is more complicated than the direct method but yields significantly more information, is used by the majority of businesses to comply with GAAP.

Heres an example:

Example calculations of operating cash flow

Here are some calculations that were performed using the direct and indirect methods.

Direct method

You run a business with total revenues of $1,200 and operating costs of $700. You would deduct operating expenses from total revenue to calculate operating cash flow. It looks like this:

Indirect method

Say your business made $750 in net income, $200 in depreciation costs, and $150 each in inventory and accounts receivables changes.

Example: expanded

The year is coming to an end, and your business has prepared its financial statements. Operational activities, financing, and investing activities make up its three sections. The operating activities and modifications to the operating assets and liabilities since the prior period are used to calculate the operating cash flow for the last three years, as shown below.

Because you are essentially converting from an accrual to a cash basis, calculating operating cash flow using the indirect method can initially seem overwhelming. Increases in assets must be subtracted from this conversion, and asset decreases must be added back in.

Youll do the opposite with liabilities. Increases are added and decreases are subtracted out. If you find this unclear, try picturing it as money. When inventory levels fall, it means that the product has been sold, which raises the amount of money received. Consequently, a decrease in inventory must be added back to net income as cash.


What is operating cash flow formula?

Operating Cash Flow is determined by adding operating income to depreciation, taxes, and any changes to working capital.

How do you calculate cash flow from operating activities?

Cash Flow from Operations
  1. Net Income plus Non-Cash Items plus Changes in Working Capital = Cash Flow from Operations
  2. Step 1: Take the net income from the income statement to begin calculating operating cash flow.
  3. Step 2: Add back all non-cash items. …
  4. Step 3: Adjust for changes in working capital.

How do you calculate operating cash flow in Excel?

To determine the total amount of tax paid, multiply the company’s EBIT by the applicable tax rate. Finally, use the following formula to determine operating cash flow: EBIT – tax paid + depreciation.

How do you calculate operating cash flow from EBIT?

To determine the total amount of tax paid, multiply the company’s EBIT by the applicable tax rate. Finally, use the following formula to determine operating cash flow: EBIT – tax paid + depreciation.

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