Cash Flow Management
4 minutes read
The Right Formula to Calculate Operating Cash Flow
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Ever looked at your business’s numbers and thought, “Okay, but how much actual cash am I making?”
This is where tracking cash flow from operations becomes crucial. It tells you how much cash your business is pulling in from its main operations—no fluff, no accounting tricks, just real cash flow.
Figuring it out isn’t complicated, but there’s a right way to do it.
Let’s go over the formula and make sure you’re calculating it correctly.
What is Operating Cash Flow?
Alright, let’s cut through the jargon—Operating Cash Flow (OCF) is the real, spendable cash your business makes from its core operations.
It’s not just numbers in a financial report or the result of accounting adjustments—it’s the actual cash moving in and out from day-to-day business activities.
Think of it as the lifeline of your business. If your OCF is strong, you’ve got enough cash to keep things running smoothly without constantly relying on loans or outside funding.
If it’s weak? Well, even a “profitable” business can struggle to pay the bills.
So, how do you measure it? Let’s break down the formula and get straight to the numbers.
Operating Cash Flow Formula
Now that we know what Operating Cash Flow (OCF) is, let’s talk about how to calculate it. There are two main ways to do this: the direct method and the indirect method—but don’t worry, we’ll keep it simple.
1. Indirect Method (Most Common)
This method starts with net income and adjusts for non-cash expenses and changes in working capital:
- Net Income: Your bottom-line profit after expenses.
- Non-Cash Expenses: Add back things like depreciation and amortization since they reduce net income but don’t affect actual cash.
- Changes in Working Capital: Adjust for changes in accounts receivable, inventory, and accounts payable to reflect the cash impact of operations.
2. Direct Method (Less Common)
Instead of adjusting net income, this method directly tracks cash inflows and outflows:
This gives a clearer picture of actual cash movements but requires more detailed record-keeping.
Most businesses use the indirect method because it’s easier with standard financial statements. Whichever method you choose, getting OCF right helps you understand if your business is truly generating cash—or just looking good on paper.
Operating Cash Flow Best Practices
Alright, knowing how to calculate Operating Cash Flow (OCF) is great—but how do you actually keep it healthy? Here are some solid best practices to make sure your business has enough cash to stay in control.
1. Speed Up Receivables
Waiting too long to get paid? That’s cash stuck in your accounts receivable. Tighten your payment terms, send invoices promptly, and follow up on overdue payments. The faster you collect, the better your cash flow.
2. Manage Payables Strategically
On the flip side, don’t rush to pay your bills if you don’t have to. Take advantage of vendor payment terms while staying in good standing. Delaying outflows (without penalties) keeps cash in your business longer.
3. Keep a Close Eye on Expenses
Not all expenses are created equal. Identify areas where you can cut unnecessary costs without hurting operations. Even small tweaks—like renegotiating contracts or switching to more cost-effective suppliers—can make a big difference.
4. Monitor Inventory Levels
Too much inventory? That’s cash sitting on your shelves. Too little? You risk stockouts. Find the sweet spot where you’re not overbuying but still meeting demand efficiently.
5. Forecast and Plan for Cash Needs
Your OCF might look good today, but what about next quarter? Use cash flow forecasting to anticipate slow periods and prepare for upcoming expenses. Staying ahead helps you avoid surprises.
At the end of the day, strong operating cash flow means a stronger business—one that isn’t scrambling for loans or running into cash shortages. Keep an eye on these best practices, and you’ll stay in control of your finances.
Take Control of Your Cash Flow with Crossval
Keeping your Operating Cash Flow (OCF) in check isn’t just about numbers—it’s about making sure your business has the cash it needs to grow, pay the bills, and stay ahead. But tracking cash flow manually? That’s a headache you don’t need.
With Crossval, you get a real-time, automated view of your cash flow, so you always know where your money is going.
✅ Automated cash flow tracking—no spreadsheets required
✅ Real-time insights to spot cash gaps before they happen
✅ Seamless integration with your existing accounting tools
💡 Try Crossval FREE for 14 days and see how easy cash flow management can be. No commitment, no hassle.
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