analyzing business profit

5 Steps to Improve Your Business Operating Cash Flow

What is Operating Cash Flow?

Operating Cash Flow or OCF is the amount of money generated by the regular operation of a business in a specific time period. The calculation of operating cash flow generally starts with revenues or net income. Although it starts with the income statement, the profit is used in both the cash flow statement and the balance sheet.

Operating Cash Flow (OCF) indicates clearly if the business is profitable or not. Due to this reason, investors or banks are much interested in knowing this number. It is one of the most critical factors to determine the success of the business.

Another sign is if the business is making money selling the product more than what is used to produce it. Yet, other costs and income contribute to this value, depending on how the business owner chooses to represent them. These numbers, however, are much transparent and bring the limelight to problem areas of your business.


How does it work?

If a company is losing money in any single area of business like in the retails, but is making good profits from outside financing or contract. Though on the whole, this company may be appearing to be profitable, when researched about it in detail, the facts may not be the same.

The OCF process can help anyone get a clear review of the parties, and anyone, after looking at the source of money, will know that the core of the business is not sustainable. These insights are beneficial for any potential investor or bank as they understand how the company runs, and they know the model in a much better way.

What Are the Operating Cash Flow Formulas?

There are three operating activities cash flow formulas to do calculations, which will help you understand your business cash flow or ocf in a better way and how the money flows in and out of your business.

1. Free cash flow formula

This Free cash flow formula (FCF) is the most important formula to calculate the cash flow.

Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure

Here, the different teams represent:

  • Net income: Found in the income statement, this is the amount left after deducting the expenses from sales, operations, or total revenue.
  • Depreciation/Amortization: A lot of assets lose value with time. Depreciation is measuring how this value decreases. Amortization is breaking the initial cost of any purchases over a lifetime. Depreciation and amortization can be found in the account statement.
  • Working Capital: The difference between your asset and liabilities is the working capital. It represents the capital used in the daily operations of your business. It can be calculated using the balance sheet.
  • Capital Expenditure: The money spent on fixed assets like real estate, equipment, or land is together known as Capital expenditures. It can be found in the Cash Flow statement.

By calculating this, you will know your operating activities cash flows’ status and how you can invest it in enhancing or advancing your business. Operating activities cash flows can also be calculated in other ways.

Depending on the availability of numbers from the balance sheet, operations, income statement, cash flow statement, and depreciation value. Companies make some adjustments or changes to the formula to eliminate the distortions and accordingly prepare the recipe.

3. Operating Cash Flow Formula

When you need better insight into your business’s typical operating Cash, you need to consider the Operating Cash Flow (OCF) Formula.

Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital

The operational income definition in the active cash flow formula is (also Earnings Before Interest and Taxes (or EBIT) and profit) your operating income minus the total revenue’s functional activities expenses. It can be found in your income statement.

When you want to apply for funding from a bank or venture capital firm, they are most likely to be interested in the output of operating cash flow formula while approving your financing.

It helps you to know if your business has sufficient operating cash flow to:

  • Pay its active activities expenses and handle accounts payable
  • Have money for future growth
  • Meet the entity’s debt requirement and interest, and repurchase shares or pay dividends of stakeholders.

3. Cash flow forecast formula

While both Free cash flow and operating cash flow give you the idea of cash flow operating activities in duration, free cash flow is not useful when planning about your future. Therefore, forecasting cash flow (and non-cash) for the upcoming month or year is considered a good idea.

Cash Flow Forecast = Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

The result will be the amount you can spend in the upcoming month, quarter, or year. It is recommended and is very beneficial for the business. The most crucial benefit of using a cash flow forecast formula is that it helps you plan ahead of time.

Secondly, You will know in advance if you have the proper financial capacity to pay the pay suppliers, tax liabilities, and employees. If its cash flow comes out to be negative, you need to either reduce the money spent on your business or increase the accounts receivable.

What does operating cash flow tell you about your business?

Cash flow is an essential aspect of every business. It plays the same value to that of the income statement or a balance sheet to some investors. It is necessary to know the availability, depreciation, or lack of cash availability in any organization. Operating cash flow helps to evaluate the exact position that would otherwise impact revenue.

Any business or organization is financially strong if its operating cash flow is high. Positive cash flow means that the company can sustain the operation, assets, non-cash, accounts payable, debts, and other expenses.

On the other hand, low operating cash flow means the business struggles to have regular operations running. Knowing your cash flow means you can make a sound financial decision according to your working capital. A good fund management system means that the business and accounts receivable can be lead to higher revenues, a lower overhead cost that will ultimately lead to more profit.

What is my real business profit?

Getting an investment from other sources outside your business is helpful, but they might cause difficulties in understanding your real profit. It is worth noting that the net operating cash flow or net cash of the business higher than the net income indicates profit. But, if the net incomes are higher than the operational cash flow consistently, monitoring the cash flow and non-cash flow should be done.

Am I in a good position for future growth?

A company’s value is determined by the addition of the future cash flow of its stream. You must calculate this if you want to know the actual cost of your company. Even potential investors and bank officers would like to see this value. Hence it plays very vitally for any business.

How healthy is my business?

When you calculate the cash flow operations, you get an idea about the future. You will know whether your business is in an excellent condition to pay the bills and staff in the current and future. It will give you an idea of your company’s health operations and help you understand if you need to focus on another area to improve your working capital.

Frequently Asked Questions

Different questions are commonly asked by the owners about calculating the operating cash flow and its usefulness. The following are a few of them answered.

1. I’m a small business owner. Do I need to calculate operating cash flow?

No matter how small or large your business is, calculating cash flow from operations formulas will help you decide your business’s present and future. It enables you to calculate the profit on a whole, which otherwise can be deceptive.

2. How does net income differ from operating cash flow?

Cash flow helps you in knowing the exact profit generated by your company in a specific duration and is calculated after subtracting the value of cash outflow from the cash inflow, while net income is the earning of business which is achieved by a company during a specific duration considering every expense made by the company during that time.

3. Do I need to use accounting software to calculate the operating cash flow?

No, it is not compulsory to have accounting software to calculate the operating cash flow. Though the software does make things easier by doing the whole process in an automated way and reducing any kind of error.

4. Operating cash flow is a useful marker for all businesses

By using the functional activities cash flow formula, anyone can easily do the calculations. Depending on your requirements, one can use the formula to calculate the cash flow or create a cash flow forecast. So, it is useful for all kinds of business, may it be of any industry or size, it is beneficial for everyone.

Operating cash flow is just one component in the company’s cash flow system. Still, it is also essential to determine the value of strength, profitability, and long-term future outlook. It directly or indirectly decided the in and outflow of money in any company during a specific duration.

It is good to know that the company has more Cash coming in than going out when you get final numbers from operating cash flows. Companies having strong OCF means that they are most likely to have a more stable income, better assets, payment abilities, and increased opportunities to expand irrespective of what the economy or their industry is going through.


Taking a closer look on how the Operating Cash Formula is used in business areas can be very beneficial, though still some situations arise in the midst of operating a business. Financial struggles are common in businesses, it makes or breaks a business future.

In cases like this, you may need help to boost your business through business loans. Reliable loan comparison websites like Instant Loan can help you scour the best business loan deals all over Singapore. They can help you check and compare the loans catered to your business needs.

Check our Instant Loan site and shop for the finest business loan deals in Singapore!

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