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Operating cash flow: how to calculate and read it

Operating cash flow (OCF, CFO) is the net cash inflow/outflow from core operations for the period. Unlike profit or EBITDA, OCF shows the actual movement of cash, taking into account changes in working capital (receivables, inventory, payables), and excludes investing and financing flows.

What the Metric Measures

It reflects the business's ability to generate cash to cover operating expenses, taxes, interest, and maintenance investments. High OCF makes it easier to self-finance growth; low OCF signals problems with payment terms, inventory, or costs.

Calculation

  • Indirect method: OCF = Net profit + Non-cash items (depreciation, provisions…) ± Changes in working capital (ΔAR, ΔInventory, ΔAP, etc.)
  • Direct method: OCF = Cash receipts from customers − Cash payments to suppliers and employees − Taxes/other operating payments
  • Conversion ratio: OCF / EBITDA or OCF / Net profit
  • Free cash flow: FCF = OCF − CapEx

Calculation example

Monthly net profit is 300,000, depreciation 80,000, receivables grew by 150,000, inventory by 60,000 and payables by 40,000. Operating cash flow = 300,000 + 80,000 − 150,000 − 60,000 + 40,000 = 210,000: there is profit, but less cash came in.

Data Sources

ERP/1C (general ledger, P&L), AR/AP modules and inventory accounting, bank statements, payment services, tax registers; agreed rules for FX conversion and transaction mapping.

Interpretation

  • Positive OCF — a sign of healthy economics and efficient working capital
  • Negative OCF while profitable — usually the result of growing receivables/inventory or worsening payment terms
  • Evaluate together with CCC = DIO + DSO − DPO and the gaps between OCF ↔ EBITDA/profit

Useful Breakdowns

  • AR/AP/Inventory by product/category and by customer/supplier
  • Sales channels, regions, currencies
  • Payment types: prepayment / post-payment
  • Receivables aging discipline and overdue amounts

Dashboard Visualizations

  • OCF trend with year-over-year comparison
  • Bridge from net profit/EBITDA to OCF
  • Working capital components: DSO/DIO/DPO and CCC
  • Collections and payments calendar, OCF plan vs. actual, and forecast

How to Set Targets

Define the target OCF and conversion ratio (OCF/EBITDA), DSO/DIO/DPO thresholds, the credit limit policy and collection SLA, and inventory levels (days of stock). Update the rolling forecast monthly (or more often).

Common Mistakes

  • Mixing calculation methods across reports
  • Misclassifying flows as operating vs. investing/financing
  • Double-counting VAT or ignoring FX effects
  • Discrepancies between bank statements and the ERP
  • Comparing unequal periods without seasonal adjustment

Questions for Discussion

  • What contributed most to the change in OCF this period — AR, Inventory, or AP?
  • Which customers/SKUs tie up the most cash?
  • What actions will deliver a quick OCF uplift within 30 days?

Questions and answers

What is operating cash flow?

The difference between cash received and paid in core operations — sales, purchases, salaries, taxes — excluding investments and financing.

How do you calculate operating cash flow with the indirect method?

Net profit + depreciation − increase in receivables and inventory + increase in payables ± other non-cash items.

Why is cash flow lower than profit?

Cash gets tied up in customer debt and inventory, while depreciation reduces profit without spending cash. That is why profit and cash should be tracked separately.