Operating cash flow (OCF) - Definition, formula and ways to improve

Apr 05, 2024

For any business, maintaining a financially stable situation with consistent growth is the ideal scenario.

In order to do this, a company must be able to measure and analyze the financial performance of the business. There are many ways to measure different aspects and one of them is to understand and measure your operating cash flow.

What is operating cash flow (OCF)?

Operating cash flow is basically the inflow and outflow of cash that a business generates during its regular operations. This metric is recorded in the cash flow statement of a company.

The operating cash flow of a business tells whether the company can generate enough liquid cash to continue operating its business and expand further.

What is the cash flow from operating activities?

• The total sale of goods and services in a given time period.

• The payments that are made to employees & vendors or suppliers.

• And other expenses in the production of goods or services are all aspects that account for the generation and calculation of operating cash flow. 

Significance of operating cash flow for businesses

When a business is performing financial analysis, apart from the balance sheet and the income statement, they also use the cash flow statement which is one of the three useful financial statements.

The first and obvious benefit of measuring your operating cash flow is that helps you understand the financial performance of the daily business activities. 

If your cash flow figure is on the positive side, then it shows that your business has a good inflow of cash. This means that you have liquid cash which allows you to be flexible with your cash reserve.

This metric is also a useful indicator to measure performance in various other business locations, domestic and international.

You can measure the operating costs of your business in all the different locations and see how they are performing compared to each other.

Another useful aspect of knowing your company's operating cash flow is the ability to plan better for the future.

Whether the business has the capability and financial resources to expand further or choose a direction to experiment with its cash reserves is something that your operating cash flow can tell.

Your company’s operating cash flow can also be positive or negative in nature. If your cash flow is positive, it means that you are getting more cash than you are spending.

If you have a negative cash flow, it means that your expenses are higher than the amount of cash that is coming into the business.

Having a positive cash flow is always better as it shows that you have the flexibility to make quicker decisions in the daily operations of the business wherever cash is needed.

How to calculate operating cash flow?

The operating cash flow formula is as follows:

Formula (short form): 

• Operating Cash Flow = Net Income + Non-Cash Expenses – Increase in Working Capital

Formula (long form):

• Operating Cash Flow = Net Income + Depreciation + Stock-Based Compensation + Deferred Tax + Other Non-Cash Items – Increase in Accounts Receivable – Increase in Inventory + Increase in Accounts Payable + Increase in Accrued Expenses + Increase in Deferred Revenue

Ways to improve your cash flow

There are multiple ways in which a business can improve its operating cash flow:

1. Renting/leasing instead of buying

For many businesses purchasing office space or buying equipment for manufacturing or other business processes requires a major capital expenditure; this may be too expensive for companies.

In situations like this, it is better for the organization to lease property or rent equipment so that they have a lesser cash burden to deal with.

2. Better inventory management

For many companies, inventory management can be an issue when purchases are made in bulk and stock is lying stagnant in a warehouse.

This keeps the company from having liquid cash as its capital is stuck in the form of inventory not being sold.

Implementing a ‘Just-in-time’ inventory management method which uses forecasting methods to predict demand can help you keep just the right amount of inventory and stock up unnecessarily. 

3. Deals with vendors & suppliers

You can also save money by striking better deals with suppliers by making early payments and getting an early payment discount from them. This helps you save cash over time and improves your operating cash flow. 

4. Automate AR & AP

When you use better tech systems to automate accounts payable and accounts receivable then you get to optimize your cash flow and save money by making and receiving payments on time. 

Interested to know what is business cash flow forecasting and how to forecast it? Check out our article- Cash flow forecasting: 4 easy steps to create it to know in detail.

Stay on top of your business operating costs with Volopay

Volopay provides an all-in-one expense management ecosystem that helps you track, control, and manage all expenses and payments through a single platform.

Our software includes a centralized system for finance and accounting teams to distribute budgets to each department and individual.

To know the importance of departmental budget for your business, check out our article on departmental budgeting.

1. Budget distribution & management

All employees who are onboarded onto Volopay will be able to use their assigned budgets to make business expenses via their physical corporate card, virtual corporate card, or the money transfer function in Volopay.

In order to control the amount that is spent, admins get to create custom approval workflows for payments through the money transfer function and set spending limits for each corporate card.

2. The Reimbursement module

If the company does not want to issue corporate cards, they can also use our reimbursement module where employees can easily submit their claims via our mobile app.

3. Volopay corporate cards

Issuing corporate cards is optional but a wise move as it helps your business control the amount of money that can be spent by employees. You get to set a custom spending limit for each card that is issued, whether that is a physical or virtual card.

This is a much better solution to control and manage operating cash flow rather than processing reimbursements and dealing with out-of-policy expenses. 

4. Automating AP

Volopay also lets you create a vendor database within the system and process their invoices easily to make faster payments.

You can schedule payments and create recurring payments for suppliers that you have a contract with so that you don’t miss out on payments and end up having to deal with late payment fees.

These efficiencies that automation helps you create ultimately affect your cash flow in a positive way.

5. Operating cost management

The best part is that no matter how you choose to create the expense system within your company, all the expenses are accessible on a single platform.

Whether it is card expenses, wire transfers to vendors, payroll, or reimbursements, each and every expense can be tracked in real-time on Volopay. 

You also get access to analytics tools where you can see how the teams and employees are spending their budgets. You can compare the current month’s spend with the previous month's.

And you can also filter down deeper to see through which payment method expenses are being made. All of this helps you stay on top of the operating costs and financial performance of your business.

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What is the difference between net income and operating cash flow?

Operating cash flow is the cash or revenue that a business generates minus all the operating expenses. Net income, on the other hand, is the revenue that the business generates which is calculated by subtracting all expenses including taxes. Net income represents profits whereas operating cash flow represents the cash reserves available for business operations and growth.

What is the difference between operating cash flow and operating cash flow ratio?

Operating cash flow is a metric used to measure the cash that is generated from operational activities. The operating cash flow ratio is the measure of a company’s ability to pay off its debt using the cash generated from operations.