Operating Cash Flow Calculator is a financial accounting tool used to calculate how much money a company is getting from its operating activities. Operating cash flow ratio is one of the key financial parameters and indicators that investors consider when choosing a company to invest money into. Therefore, knowing what’s your OCF ratio, how to calculate and interpret it is very important for every business.

Check out this category, if you need more financial-related calculators. Further, if you are interested in math, check our Segment Addition Postulate or Triangle Angle Calculator.

Operating Cash Flow (OCF) – Definition

OCF represents the amount of money a company earns through normal business operations. It shows whether a firm can produce a positive cash flow ratio and thus continue with the business operations. On the other hand, if a firm produces a negative cash flow (huge expenses), it will need to seek external financial sources for its capital expansion. 

What is operating cash flow (OCF)? - Definition

Operating cash flows indicate the success of a company’s business activities. Compared to other cash flow indicators, operating cash flow ratio is the most reliable because it determines the state of a company based on real money (not borrowing).

There are three types of cash flow:

  • operating,
  • investing,
  • and financing.

Operating Cash Flow Formula

There are over five important elements we need to find before calculating operating cash flow. Take a look at the elements and their formulas below:

OCF = Net \; income + Depreciation + Amortization + Change \;operating \;working \;capital + Income \;tax \;payable + Net \;of \;other \;cash \;flows

See, in order to calculate the OCF, first, we need to know:

  • Change operating working capital
  • Net income, depreciation.
  • Change accounts receivables (CAR).
  • And change in accounts payable (CAP).

You can find “change operating working capital” with the following formula:

COWC = CI + CAR + CAP

Change inventory (CI) is calculated by the difference between the beginning and ending inventory levels.

CI = Beginning \; inventory - End \; inventory

Change account receivables (CAR) represents the amount of money clients have to pay to the company for the purchased services or products.

CAR = Beginning \; accounts \; receivables - End \; accounts \; receivables

Change in accounts payable (CAP) indicates how much money a company is in debt to its suppliers and providers

CAP = End \; accounts \; payable - Beginning \; accounts \; payable

Operating Cash Flow – Components

We already mentioned that the calculation of operating cash flow depends on the following parameters (components):

  • Net income 
  • Depreciation and Amortization
  • (CI) Change in inventories
  • (CAR) Change in accounts receivables
  • (CAP) Change in accounts payable
  • Income taxes payable
  • Net of other cash flows
  • Change in operating working capital

Operating Cash Flow vs. Net Income

When an investor is looking for a company to invest money in, some of the indicators they consider are operating cash flow and net income. Net income is the amount of cash a company is left with after paying all the debts, expenses, taxes, and costs of goods sold. In comparison, operating cash flow means the capital generated by the company’s operations, or revenues, less operating expenses.

Net income indicator can be handy, but it does not convey the full picture of a company’s current state. Therefore, analysts and investors always prefer operating cash flow for checking a business health.

Net income comes in three possible report periods: monthly, quarterly, or annually. The report for a month can indicate that the net income is significantly high, whereas the quarterly or an annual report can show you completely opposite results. This is the reason why operating cash flow is a more reliable means.

Free vs. Operating Cash Flow: Difference?

By definition in accounting, operating cash flow is an financial indicator that checks whether a company is capable of producing enough capital to pay all the bills and expenses. Therefore, every company has to have more cash inflows than cash outflows (expenses) to function properly and keep up with the business competitors in the long run. Learn more about accounting with our Accounting Profit Calculator.

In contrast, free cash flow indicates how much cash all the company’s investors have before deducting debt payments, taxes, dividends, or share repurchases. So, for example, when banks give loans to a company, firstly, they ensure its can generate “free cash flow”, which will indicate that the company will be able to repay the lent money to the bank.

In case of a company wants to lend additional credit from the bank, the bank looks at its free cash flow and determines how much additional funds it can get.

Operating Cash Flow Calculator – How to Use?

Was it too much to remember all the formulas for calculating OCF? Certainly, there are plenty of them, and there is a lot easier way to do it. How? For a quick and reliable way to measure the OCF rate of a company, you can use our Operating Cash Flow Calculator. In the steps below, you will learn about all the parameters and how to use the calculator.

Steps:

  1. Firstly, you need to find the net income of a company you are measuring.
  2. Then, calculate the addition of depreciation (tangible assets) and amortization (intangible assets)
  3. Use the formulas mentioned in the first sections and measure the company’s change in inventories, accounts receivables, and accounts payable.
  4. Enter income taxes payable, net of other cash flows, and change in operating working capital
  5. The calculator will sum all the input values up and return operating cash flow in your currency.

Practical Example

Let’s use the calculator in the practical example below and calculate the operating cash flow for a given company.

Scenario: There is company A, and investors want to invest their money. However, first, they want to ensure that it has potential by calculating its operating cash flow rate. How can you handle that?

Let’s get started:

Net income: $5,000,000

Depreciation: $420,000

Amortization: $350,000

(CI) Change in inventories: -$620,000

(CAR) Change accounts receivables: -$1,000,000

(CAP) Change accounts payable: $90,000

Income taxes payable: -$190,000

Net of other cash flows: $9,000,000

Change in operating working capital: -$1,530,000

Operating cash flow is $13,050,000. The calculator also informs you that “Your company looks to be doing great”.

FAQ

What is operating cash flow?

In accounting, operating cash flow is the money that a firm earns through normal business operations. It shows whether a firm can continue with its operations.

How do you calculate operating cash flow?

We calculate operating cash flow with the following formula:
Operating cash flow = Net income + Depreciation + Amortization + Change operating working capital + Income tax payable + Net of other cash flows.

What is a good operating cash flow?

If a company’s OCF ratio is less than 1.0 (it has less generated cash than the debts it needs to pay) indicates that the company is not in good health. On the contrary, the OCF ratio greater than 1.0 signalizes the company still owns some money after paying all the necessary debts and taxes. A higher OCF ratio means a better financial situation in the company.

How to improve cash flow from operations?

You can improve cash flow and increase the OCF rate by:
– Collecting overdue receivables
– Increasing inventory turnover
– Always paying suppliers on time
– Raising prices for the goods and services that you sell
– Using electronic payments

What happens if operating cash flow is negative?

A negative operating cash flow rate indicates that a firm is using and investing more money into the long-term project that it’s actually profiting from. Therefore, you should always try to avoid having a negative operating cash flow ratio because investors will never decide to invest their capital into those companies.