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Operating Cash Flow (OCF) measures the actual cash your business generates from its core operations. Unlike net income, OCF is hard to manipulate with accounting choices — cash either arrived in your bank account or it didn't.
The indirect method formula
OCF = Net Income + Depreciation & Amortization + Working Capital Changes
This is the most common method (indirect method) because it starts from the readily available net income figure and adjusts for non-cash items and timing differences.
Why OCF differs from net income
Depreciation reduces reported profit but doesn't use cash. A $10k server depreciated over 5 years reduces net income by $2k/year but was paid for in year 1. Adding back D&A converts income-statement profit into cash-based profit.
Working capital changes reflect the timing difference between revenue recognition and cash collection: - Accounts receivable increased → you invoiced customers but haven't collected yet → OCF is lower than net income - Accounts payable increased → you received goods but haven't paid yet → OCF is higher than net income
Free Cash Flow (FCF)
FCF = OCF − Capital Expenditures
Free cash flow is what's left after maintaining and growing the asset base. It's the metric private equity firms and sophisticated investors use to value businesses because it represents actual distributable cash.
| OCF | Capex | FCF | Interpretation |
|---|---|---|---|
| +$100k | $5k | +$95k | Healthy — business is a cash generator |
| +$100k | $50k | +$50k | Acceptable — investing heavily in assets |
| +$100k | $120k | −$20k | Growth investment phase |
| −$50k | $10k | −$60k | Cash drain — requires external funding |
Cash conversion ratio
Cash Conversion Ratio = OCF ÷ Net Income
CCR above 1× means the business generates more cash than reported profit (good). CCR below 1× means profit is outpacing cash collection — watch accounts receivable. CCR above 1.5× often indicates large non-cash depreciation charges relative to capex.
Frequently asked questions
What does this calculator do? Calculate Operating Cash Flow from net income, D&A, and working capital changes — plus Free Cash Flow and Cash Conversion Ratio.