Operating Cash Flow

Intermediate

Operating cash flow is the cash a business generates from its normal day-to-day activities, such as selling goods and paying suppliers, staff and taxes.

Operating cash flow appears in the first section of the cash flow statement. It shows whether the core business brings in more cash than it spends.

It is often calculated by starting with net income and adjusting for items that do not involve cash. Non-cash expenses, such as depreciation, are added back. Changes in working capital are then included: if customers owe more money at the end of the year than at the start, that increase is subtracted, because the sales were recorded but the cash has not yet arrived.

For example, a company with net income of 5 million, depreciation of 2 million and an increase in receivables and inventory of 1.5 million would report operating cash flow of 5.5 million.

Strong and steady operating cash flow is a sign of a healthy business. Persistent gaps between profit and operating cash flow can be a warning sign, for example if customers are not paying or inventory is piling up.

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