Cash & working capital
Operating cash flow
Operating cash flow is the cash a business’s normal operations bring in or use in a period, before investing and financing activity.
Operating cash flow = Net income + Non-cash charges (such as depreciation) − Increase in working capital
Worked example
| Net income | $300,000 |
| Depreciation and amortization | $50,000 |
| Increase in accounts receivable | $80,000 |
| Increase in inventory | $40,000 |
| Increase in accounts payable | $20,000 |
$300,000 + $50,000 − $80,000 − $40,000 + $20,000 = $250,000
Why it matters
Profit is an accounting result; operating cash flow is the money. When operating cash flow runs well below net income for several periods, receivables or inventory are absorbing the profit.
Common mistakes
Where it misleads
Getting the working capital signs backwards: a rise in receivables uses cash, a rise in payables frees it.
Counting loan proceeds or owner contributions, which are financing, as operating cash.
Reading one month on its own, when the timing of a few large payments can swing it.
Related terms
Keep reading
- Free cash flow (FCF)Free cash flow is the cash a business generates from operations after paying for the equipment and other long-term assets it needs to keep running.
- Working capitalWorking capital is the money tied up in running the business day to day: current assets such as cash, receivables and inventory, minus the current liabilities due within a year.
- Accrual vs cash accountingAccrual accounting records revenue when it is earned and expenses when they are incurred; cash accounting records them only when money actually comes in or goes out.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.