Operating Cash Flow (OCF): Definition and Formula

A business’s operating cash flow is the money brought in and spent from regular daily work. It shows if a company can make enough cash just by running its regular business activities.

About half of small business employers (50%) cited uneven cash flow as a financial challenge in the previous 12 months in the Federal Reserve's 2025 Small Business Credit Survey. Even a business with strong sales can end up short on cash if customers pay slowly while supplier bills come due on schedule.

This guide covers what operating cash flow measures, how to calculate it, and how to interpret the results for your business.

What is operating cash flow?

Operating cash flow (OCF), also called cash flow from operations or cash flow from operating activities, tracks the cash a business receives and spends through its normal, day-to-day tasks. It measures a business’s ability to generate cash without turning to outside financing, such as loans, bonds, or stock offerings. In other words, operating cash flow is more about a company’s liquidity than its profitability.

According to the US Securities and Exchange Commission, a cash flow statementorganizes cash movement into three categories:

1. Operating activities
2. Investing activities
3. Financing activities

Operating cash flow measures only the first category, which are the cash effects of a business’s core activities, including buying inventory, paying employees, and collecting payment from customers. Operating cash flow measures the cash generated or used by these activities alone, separate from investing and financing activities.

Why operating cash flow matters

Operating cash flow shows whether a business can pay its own way. Positive operating cash flow means more cash comes in from day-to-day operations than goes out. Negative operating cash flow means the opposite, and it can happen even to a profitable business, such as one that’s growing fast or building up inventory ahead of a busy season.

A few signs point to operating cash flow that needs looking into:

• Cash reserves shrink even as sales grow
• Supplier payments get delayed, or terms get renegotiated under pressure
• The business leans on financing to cover routine costs like payroll or rent

The Fed’s 2025 Small Business Credit Survey found 60% of small employers applied for financing in the previous 12 months, and the most common reason was to meet operating expenses (56%). Needing a loan to cover day-to-day costs is a sign operating cash flow isn't keeping pace with the business.

Two ratios help put operating cash flow numbers in context:

Operating cash flow ratio = Operating cash flow /÷ Current liabilities

This shows whether a business generates enough cash to cover its short-term bills. A ratio above 1 means yes.

Operating cash flow margin = Operating cash flow / Revenue x 100

This shows what percentage of revenue converts into cash from operations, rather than sitting in unpaid invoices or unsold inventory.

Timing is important here. In a 2025 Shopify survey of store owners, 20% said they wished they’d waited for more consistent cash flow before scaling, which was the most common regret.* 

For store owners working through a temporary cash flow gap, Shopify Capital offers funding based on a store’s sales history, accessible directly from the Shopify admin, without the paperwork of a traditional bank loan.

How to calculate operating cash flow

There are two ways to calculate operating cash flow: the direct method and the indirect method. The direct method adds up actual cash available, like cash collected from customers and cash paid to suppliers and employees. The indirect method determines cash flow based on transactions made rather than cash on hand.

Many businesses prefer the indirect method because it allows them to reconcile their income statement with their cash flow statement and account for differences between the two. It shows how profitability and cash flow relate to each other.

Indirect method

The indirect method starts with net income from the income statement, and adjusts it for things that don’t show up as everyday revenue or expenses but still affect cash.

First, add back noncash expenses, like depreciation (for tangible assets) and amortization (for intangible assets). These lower net income on paper without any cash leaving the business. Then factor in changes in working capital, pulled from the balance sheet.

OCF = Net income + Noncash expenses ± Changes in working capital

Working capital is a business’s current assets minus current liabilities—basically the cash tied up in day-to-day operations, tracked over a business cycle that’s typically one year. Components that affect working capital include:

• Inventory. Buying more ties up cash, while selling it down frees cash up.
• Accounts receivable. Money customers owe for goods or services already delivered. A growing balance means more cash is tied up in unpaid invoices.
• Accounts payable. Money owed to suppliers. A growing balance means the business is holding onto its own cash longer before paying it out.
• Short-term debt and taxes due. Amounts owed within the year. Like accounts payable, cash stays in the business until these come due.

When working capital goes up, it typically means more cash went out so cash flow takes a hit. When it goes down, the opposite happens, and cash gets freed up.

Direct method

The direct method tracks only the cash that actually moves in and out of the business during a period.

• Cash in. Money collected from customers, plus any interest or dividends received.
• Cash out. Wages and salaries, payments to suppliers, and interest and taxes paid.

OCF = Cash revenue − Cash paid for operating expenses

Example of operating cash flow

Here’s an example of calculating OCF using the indirect method. Say a small home goods store closes out the year with these numbers on its income statement: $410,000 in revenue, $260,000 in expenses, and $85,000 in net income. That net income is the profit figure on the store’s tax return and is not the same as the cash sitting in the bank.

To get from net income to operating cash flow, you’d need to walk through each adjustment:

• Net income. $85,000, the starting point from the income statement.
• Add back depreciation and amortization. Plus $12,000. This covers the store’s shelving and point-of-sale equipment, recorded as expenses even though no cash actually left the business.
• Subtract the increase in inventory. Minus $18,000. The store stocked up ahead of the holiday season, tying up cash in unsold goods.
• Subtract the increase in accounts receivable. Minus $9,000. More wholesale customers bought on 30-day terms instead of paying upfront.
• Add the increase in accounts payable. Plus $6,000. The store negotiated longer payment terms with two suppliers.

OCF = $85,000 + $12,000 − $18,000 − $9,000 + $6,000 = $76,000

Net income comes in at $85,000, while operating cash flow is $76,000. Much of that gap traces back to the growing accounts receivable balance and the inventory buildup.

Unpaid invoices are a common driver of this kind of gap. In a 2026 QuickBooks report, 59% of small businesses said they had invoices overdue by more than 30 days. Those waiting on unpaid invoices were owed about $17,700, on average.

Shopify store owners can review their own earnings and spending anytime from the Finance section of the Shopify admin, which pulls sales, payouts, and expenses into one place. Apps like Better Reports and Taxomate can help store owners customize and schedule financial reports or sync data with accounting software like QuickBooks and Xero.

Operating cash flow vs. net income

Businesses evaluate operating cash flow alongside net income to see if profitability and cash generation are moving in the same direction (presumably upward), or if they are diverging, and to understand why.

Operating cash flow and net income might seem like the same thing. Both are concerned with tracking the movement of money, but there’s a difference, particularly in the accounting method used to track them. 

How are they similar?

Each is an essential measure of a business’s financial health. Net income gauges strength based on profitability, while operating cash flow is more concerned with liquidity and the day-to-day ability of the business to pay recurring expenses from sales or revenue.

How are they different?

Although both are a measure of a company’s financial condition, there are important differences.

• Net income is based on the accrual method of accounting. Under this method, income is generally reported in the year it’s earned and expenses are deducted in the year they’re incurred, regardless of when cash actually changes hands, according to the IRS.
• Operating cash flow uses cash accounting, which tracks only actual receipts and payments of money in the financial year.

A company’s operating cash flow can be more or less than its net income, depending on its circumstances. Slower collections from customers at one company might be the cause of cash flow lagging behind profit, while at another company with large depreciation charges, operating cash flow might exceed net income.

*Based on a 2025 survey of 500 Shopify merchants conducted in English across Australia, Canada, the United Kingdom, Ireland, New Zealand, and the United States. Respondents were established merchants with more than two years on the platform. Results reflect the experiences of this specific sample and may not be representative of all merchants.