Operating Cash Flow
QUICK ANSWER
Operating Cash Flow measures the cash a company generates from its normal business operations, adjusting for non-cash expenses and working capital changes.
In depth
Operating Cash Flow starts with net income and adjusts for non-cash expenses such as depreciation, along with changes in working capital like receivables, payables, and inventory. It provides a clearer view of actual cash generated by the business compared to accounting profit. For startups, this distinction is critical because profitability does not always mean liquidity. A company can show profits but still face cash shortages due to delayed customer payments or upfront expenses. Strong operating cash flow indicates the business can sustain operations and reduce reliance on external funding.
Example
Let’s consider a real-world example of a SaaS startup analyzing its cash position.
The company reports:
Net income: $25,000
Depreciation: +$10,000
Increase in accounts receivable: –$12,000
Calculate Operating Cash Flow:
Operating Cash Flow = $25K + $10K – $12KOperating Cash Flow = $23,000