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Explore operating cash flow and how it indicates the cash generated from a company’s core business activities.
Operating Cash Flow (OCF) is one of the most important measures of a company’s financial strength. It shows how much cash a business generates from its core operating activities, such as sales, production, and service delivery—without considering financing or investing activities.
Strong operating cash flow indicates that a company can comfortably pay its bills, reinvest in growth, and sustain daily operations.
Operating Cash Flow refers to the cash generated (or used) by a company’s main business operations within a specific period.
It helps determine whether the firm’s regular activities—excluding investment income, loan proceeds, or financing—are financially viable and sustainable.
Key points:
It reflects real cash, not accounting profit.
It excludes non-cash items like depreciation and amortisation.
It adjusts net profit for changes in working capital.
Operating Cash Flow is defined as: “The cash inflows and outflows directly related to a company’s primary revenue-generating activities.”
This includes:
Cash received from customers
Cash paid to suppliers
Cash paid for salaries, utilities, and operational expenses
Cash adjustments linked to working capital
Non-cash charges (e.g., depreciation) added back
OCF gives investors a realistic picture of how well the business converts revenue into usable cash.
The most widely used formula is:
Operating Cash Flow = Net Income
Non-Cash Expenses (e.g., Depreciation, Amortisation)
± Changes in Working Capital
– Gains + Losses on Non-Operating Activities
Operating Cash Flow = Cash Received from Customers
– Cash Paid to Suppliers
– Cash Paid for Operating Expenses
– Cash Paid for Taxes & Interest
The indirect method is more popular because it aligns with accrual accounting and is easier to derive from financial statements.
Operating cash flow is essential because it:
Shows whether the company can generate enough cash to sustain operations
Helps assess liquidity and short-term financial health
Indicates earnings quality
Highlights how efficiently profits are being converted into cash
Helps identify cash-flow-driven risks early
Supports decision-making for expansion, dividends, and debt repayment
Offers insights that can be relevant for evaluating the entity’s financial standing
A consistently positive OCF may indicate that the business is generating sufficient cash from its operations.
Consider the following illustrations:
A company reports:
Net Income: ₹8,00,000
Depreciation: ₹1,20,000
Increase in Inventory: ₹50,000
Increase in Accounts Payable: ₹30,000
Operating Cash Flow = 8,00,000 + 1,20,000 – 50,000 + 30,000
= ₹9,00,000
Cash received from customers: ₹20,00,000
Cash paid to suppliers: ₹12,00,000
Cash paid for salaries and expenses: ₹4,00,000
Operating Cash Flow = 20,00,000 – 12,00,000 – 4,00,000
= ₹4,00,000
Analysing Operating Cash Flow offers several practical insights for assessing a company’s financial strength:
Provides a clearer picture of operational performance than net profit
Helps detect earnings manipulation through non-cash adjustments
Shows whether the business can self-fund its operations
Useful for comparing companies across industries
Helps in evaluating the sustainability of a company’s operations
Aids in planning working capital and future cash needs
Despite its importance, OCF has limitations:
Large working capital changes can distort results
Does not include investment or financing needs
Not suitable for asset-heavy industries with large capital expenditure
Can appear strong even if profits are weak (temporarily)
Differences in accounting practices may affect comparability
OCF is typically evaluated alongside net income, free cash flow, and financing activities.
Operating Cash Flow is an important indicator of a company’s financial health and sustainability. It highlights the quality of earnings by focusing purely on cash-based results.
Key Highlights:
Operating Cash Flow measures the actual cash generated from day-to-day operations.
It excludes non-operating and non-cash items.
Strong OCF means reliable cash generation and stronger financial stability.
Use both formulas (direct and indirect) to understand cash movements thoroughly.
Always analyse OCF trends over multiple periods for improved insights.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Operating Cash Flow represents the cash generated from a company’s core business activities, excluding cash flows from financing and investing. It reflects the organisation’s ability to produce cash from day-to-day operations.
Operating Cash Flow measures cash generated solely from core operations, while Free Cash Flow deducts capital expenditure from OCF to show the cash available for reinvestment, debt repayment, or shareholder distribution. FCF therefore provides a broader view of financial flexibility.
Operating activities include cash inflows and outflows related to production and sales, such as receipts from customers, payments for inventory, wages, rent, utilities, taxes, and other routine operating expenses. These items capture the organisation’s everyday cash movements.
Operating Cash Flow is typically calculated using the indirect method:
OCF = Net Income + Non-Cash Expenses ± Changes in Working Capital.
This approach adjusts net profit for non-cash items and shifts in operational assets and liabilities to derive actual cash generated.
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