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Financial metrics glossary

Operating cash flow: definition, formula and example

Operating cash flow is the cash a company's normal operations generate or use in a period, before spending on long-term assets and before any financing. It starts from net income, adds back non-cash charges such as depreciation, and adjusts for the change in working capital.

Updated

Formula

  • Operating cash flow = Net income + Depreciation and amortization − Increase in working capital
  • Increase in working capital = Increase in receivables, prepaid expenses and other current assets − Increase in payables, accruals and deferred revenue
  • Change in cash = Operating + Investing + Financing cash flow

Worked example

Sample

SAMPLE · Northbridge Analytics, September 2026

Northbridge Analytics, the fictional software company in the Financial Analyst's public sample, for September 2026, indirect method. Net income and the cash balances are the figures its report prints; depreciation and the working-capital changes come from the month-end balance sheets of the same books. A minus means the line used cash:

Line Cash effect
Net income (the report's operating result) −$62,145.77
Depreciation added back (non-cash) +$1,020.00
Change in Stripe Clearing −$4,360.46
Change in Accounts Receivable +$1,050.00
Change in Prepaid Expenses +$1,350.00
Change in Accounts Payable +$4,310.74
Change in Accrued Commissions −$6,480.00
Change in Deferred Revenue −$23,100.00
Operating cash flow −$88,355.49
  1. Operating cash flow = −$62,145.77 + $1,020.00 (depreciation) − $27,229.72 (working capital) = −$88,355.49
  2. Investing (equipment bought) = −$2,160.00; financing = $0.00
  3. Change in cash = −$88,355.49 − $2,160.00 + $0.00 = −$90,515.49 ($1,544,959.17 → $1,454,443.68)

Operating cash flow, September 2026: −$88,355

The month's net burn — the whole fall in cash, $90,515 — includes the $2,160 spent on equipment; operating cash flow does not.

How to read it

  • Operating cash flow is where profit meets the bank. A company can report a profit and still use cash, when customers pay later than the sale is booked or stock is bought ahead of sales.
  • Working capital moves it both ways. A rise in receivables uses cash; a rise in payables or in deferred revenue — customers paying in advance — brings cash in before the expense or the revenue reaches the P&L.
  • Look past a single month. Annual prepayments, quarterly bills and one large collection can make a month's operating cash flow far better or worse than the business's run rate.
  • Operating cash flow leaves out spending on equipment and other long-term assets. Operating cash flow minus that spending is free cash flow.

Original research: Financial benchmarks for small US public companies, by industry →

Where it shows up in the monthly management report

The report's “Cash and working capital” page shows the cash balance, receivables and payables with days sales outstanding and days payable outstanding — the working-capital lines that separate operating cash flow from profit.

Its 13-week cash outlook is direct-method — each week's receipts, payments and ending cash — and the Financial Analyst runs it in base, upside and downside scenarios.

  • Open the sample workspace — a fictional company's books, worked by the Financial Analyst, with its monthly report. No signup.
  • The Financial Analyst — what it reads from your accounting system, what the report contains and what it costs.

Frequently asked questions

What is the difference between operating cash flow and net income?

Net income records revenue when it is earned and costs when they are incurred. Operating cash flow records the cash that moved: it adds back non-cash charges such as depreciation and adjusts for changes in receivables, payables and other working capital.

What is the difference between the direct and indirect method?

Both arrive at the same figure. The direct method lists cash received from customers and cash paid to suppliers and staff; the indirect method starts from net income and adjusts it for non-cash items and working-capital changes.

What is the difference between operating cash flow and free cash flow?

Free cash flow is operating cash flow minus capital expenditure — what is spent on equipment and other long-term assets. It is the cash left after keeping and growing the asset base.

How is operating cash flow different from net burn?

Net burn is the whole fall in cash excluding financing, so it includes spending on equipment. Operating cash flow leaves that spending out; for a company that buys little equipment the two are close.