You’re closing the month and realize you can’t make payroll; customer payments came in late. Your P&L shows profit, but your bank account tells a different story. That’s where operating cash flow comes in. It tells you whether your business actually has money to spend. Whether you can pay vendors, hire people, and keep operations running.
Most finance teams track net income or EBITDA. But those include accounting adjustments that don’t reflect what’s happening with your cash. Operating cash flow strips those out. It shows what’s real.
Here’s how to calculate operating cash flow, why it matters, and where even experienced teams get tripped up.
Understanding operating cash flow
Operating cash flow measures how much cash your business generates from core operations over a set period. It’s the first section on your cash flow statement. It shows whether the business funds itself through operations, or if you’re relying on external capital.
Here’s the key difference with net income: net income relies on accrual accounting. You record revenue when you invoice, not when paid. Same goes for expenses. You also book non-cash charges like depreciation.
Operating cash flow ignores all of that. When a customer pays? Cash in. When you pay a vendor? Cash out.
The gap between net income and OCF shows how much your statements rely on accrual accounting. As Wall Street Prep outs it: "the greater the variance between a company operating cash flow (OCF) and recorded net income, the more its financial statements (and operating results) are impacted by accrual accounting."
How to calculate operating cash flow
There are two ways: the indirect method and the direct method. GAAP prefers the indirect method for reporting. But the direct method is often more useful internally.
The indirect method
Start with net income. Adjust for non-cash items and working capital changes:
Operating cash flow = Net income + Non-cash expenses + Changes in working capital
Example breakdown:
OCF = Net income + Depreciation & Amortization + Stock-based compensation + Deferred taxes + Other non-cash items – Increase in accounts receivable – Increase in inventory + Increase in accounts payable + Increase in accrued expenses + Increase in deferred revenue
You add back non-cash expenses that lowered net income but didn't use cash (such as depreciation or stock-based comp). Then adjust for working capital:
- If accounts receivable increases, you've booked sales but didn’t get paid, so subtract that.
- If accounts payable increases, you owe more but haven't paid, so add that.
Here’s an example:
- Net income: $100,000
- Depreciation: +$15,000
- Stock-based comp: +$20,000
- Accounts receivable grew: -$30,000
- Inventory increased: -$10,000
- Accounts payable up: +$25,000
- OCF = $120,000
You reported $100k profit but generated $120k in operating cash flow. Timing and non-cash adjustments make up the difference.
The direct method
This approach is simple: total up cash collected from customers, then subtract operating expenses paid in cash.
operating cash flow = cash received from customers – cash paid for operating expenses
It gives a clear view. But most systems aren’t set up to track this granularity. It’s harder to maintain, but great if you can pull it off.
If you’re building internal dashboards or models, the direct method is easier to read and act on.
Choose the right timeframe and adjustments
- Monthly operating cash flow helps spot issues early.
- Quarterly smooths out volatility.
- Annual helps investors, but moves too slowly for decision-making.
Startups benefit most from tracking OCF monthly. Spot issues before they snowball. Monthly numbers get noisy, though: a single payment can swing results.
Look at rolling three-month or quarterly averages for a clearer trend with fewer blips. Annual OCF is good for investors but too slow for daily management.
Non-cash adjustments
Key non-cash expenses to add back:
- Depreciation and amortization: Spread out asset cost for books, but you paid upfront (shows in investing cash flow, not operating).
- Stock-based compensation: Paying in equity, not cash. It matters for dilution, but not for OCF.
- Deferred taxes: Tax charges that don't hit cash immediately.
- Impairment charges: Asset write-downs with no cash out.
Working capital changes
Working capital shifts are often bigger than profit.
- Accounts receivable down = faster customer payments → OCF goes up
- Inventory up = more cash in goods → OCF goes down
- Accounts payable up = delayed supplier payments → OCF goes up
- Accrued expenses down = faster payments → OCF goes down
Seasonality hits working capital hard. For example, retailers stock up before holidays, so OCF dips in Q3 and Q4, then rebounds in Q1.
Plan ahead. Build cash reserves during peak periods to cover leaner times.
Why operating cash flow matters
Positive OCF means you’re generating enough cash to fund the business yourself. That’s a turning point.
With Runway's headcount planning, you can model the cash impact of a new hire before you make the offer. See whether current operating cash flow supports growth, or if it’s too soon.
Investors care deeply about OCF. It proves the business model works. If revenue’s growing but operating cash flow is negative, something’s off. You’re spending too much or collecting too slowly.
OCF tells you what the business can support: salaries, margin structure, growth. It shows if self-funding is realistic.
And when it starts to fall while revenue holds steady, it’s an early warning:
- Are collections slowing?
- Is inventory creeping up?
- Are you paying vendors too fast?
OCF lets you fix the right problem before it gets expensive.
How operating cash flow connects to other metrics
Burn rate
Burn rate tracks how quickly you’re using cash. If OCF is negative, you’re burning cash just to operate.
You can boost OCF and reduce burn by:
- Collecting faster on receivables
- Lowering inventory
- Extending payables (sensibly)
See more in our cash flow metrics guide.
Free cash flow
Free cash flow (FCF) goes further than OCF.
free cash flow = operating cash flow – capital expenditures
Operating cash flow shows what the business generates.
Free cash flow shows what’s left after investments. Many startups show positive OCF but negative FCF if they're buying equipment or scaling infrastructure.
Comparing gross revenue with cash flow highlights the real bottom line.
Cash runway
Runway measures how long your cash will last at current burn.
cash runway = current cash balance ÷ monthly net burn rate
Once OCF is positive, your runway can stretch forever. Until then, every OCF improvement adds weeks or months.
Cash conversion cycle (CCC)
This tracks how long cash is trapped in operations.
CCC = days inventory outstanding + days sales outstanding – days payable outstanding
Shorter CCC = stronger OCF. Collect from customers faster, trim inventory, and pay suppliers smartly. Each area touches your working capital and OCF calculation.
Optimizing the cash conversion cycle is a fast OCF win. Our guide to average collection period dives deeper into this.
Working capital
Working capital (= current assets - current liabilities) is closely tied to OCF. If working capital rises, cash gets used. If it shrinks, cash is freed up.
Fast growth can balloon working capital as customer lists grow and inventory piles up. Even with strong net income, rapid scaling eats up cash and craters OCF.
Path to profitability
Positive OCF is a milestone that means more than accounting profit. You can tweak net income with accounting choices, but OCF is cash reality. When OCF flips positive, your core business is proven.
Getting there means:
- Improving unit economics
- Lowering customer acquisition cost
- Faster collections
- Tight working capital management
If OCF turns positive, the business is self-sustaining.
Watch out for these pitfalls
Even experienced teams make these mistakes:
Mixing up OCF with net income or EBITDA
These tell very different stories. Net income includes lots of non-cash items. EBITDA removes some things, but skips working capital.
You can show shiny EBITDA but weak OCF if working capital keeps rising.
Missing non-cash adjustments
Don’t leave out depreciation, amortization, or stock-based comp. These are musts in the OCF formula.
Overlooking working capital changes
Working capital moves can be larger than net income. A swing in accounts receivable can wipe out your reported profit in OCF terms. Track them monthly.
Putting CapEx in OCF
Capital expenditures go in investing activities, not operating. Leave equipment, capitalized software out of OCF.
Mixing up cash flow categories
Keep cash flows sorted. Loan proceeds are financing. Asset sales are investing. Keep it clean.
Ignoring seasonality
Many businesses run on cycles. Build reserves during peaks and trim in low seasons.
Compare OCF to the same period last year. Use rolling 12-month windows for a true look.
Mixing one-time items with recurring OCF
One-time wins or settlements bump up OCF for one period. Keep them separate when spotting trends or forecasting.
CAFLOU lists others: not tracking OCF regularly, skipping long-term outlooks, not chasing overdue receivables, or missing inventory issues. All can impact OCF.
Automating operating cash flow in Runway
Runway cuts out the manual work you're doing in spreadsheets. Connect your accounting system, and your OCF calculations update automatically.
Connect your accounting data
Plug in your general ledger. Runway works with most accounting software such as QuickBooks, Xero, and NetSuite. Your actuals sync in. Balance sheet, income statement, and cash activity included.
Build databases from these integrations to create your OCF foundation. Pick your data source, choose drivers (amount, net balance, net change), and add segmentation (account, department, class). This is how you'll reference data in formulas later.
Pick your calculation method
Runway supports both direct and indirect methods.
Direct method: If your integration tags cash flow activity, like Xero's "CF Activity Type", just sum all operating transactions. You'll get immediate OCF without building formulas from scratch.
Indirect method: Start with net income and adjust for non-cash items and working capital changes. Use Runway's formulas to pull from your income statement and balance sheet databases, filter by account or category, and compute deltas using date ranges.
Build your OCF model
Create a model dedicated to cash flow. This organizes your related drivers in one structured table where you can write formulas and reference them later.
Your OCF model should include:
- Net income (from your P&L build or income statement database)
- Depreciation & amortization (non-cash expense accounts)
- Stock-based compensation (non-cash expense accounts)
- Accounts receivable changes (delta between this month and last month)
- Inventory, accounts payable, and other working capital accounts
- Working capital impact (sum of all changes)
- Operating cash flow (your final number)
Runway's formula editor lets you reference drivers, apply filters, and calculate deltas using date ranges. To track AR changes, reference your balance sheet database's net balance column for "this month" and "last month," then subtract. Runway automatically wraps multi-row references in sum() to keep you accurate.
Automate working capital changes
If your accounting integration provides net change data for balance sheet accounts (like QuickBooks' "Net Change" or Xero's "Net Change" driver), use it. Don't calculate deltas manually. Sum the net changes, apply the correct signs, and you'll see working capital impact instantly.
No net change data? Use end-of-period balances for two periods and subtract using date filters in your formulas.
Keep actuals and forecasts separate
Every driver in Runway separates actuals from forecasts. Use real data up to your last close, then forecast formulas for future periods. Update last close when you close a month. Your OCF stays accurate and current.
Validate your numbers
Runway's drill-in feature shows exactly how each OCF component builds from underlying references. Debug formulas, verify filters, and trace calculations back to source data. Summing monthly or quarterly views helps you spot trends and catch one-off swings.
Present with clarity
Add your OCF drivers to a model or drivers table block on a page. Set currency formatting and decimals for consistency. Group related drivers like net income, non-cash items, working capital changes, so your team can follow the logic.
Runway updates OCF automatically as accounting data syncs. Share your model with your team, so everyone sees the latest numbers without manual updates.
Frequently Asked Questions
What's a "good" operating cash flow margin, and how does it vary by business model?
There's no universal target. It depends on your business model. Product and SaaS companies typically aim for OCF margin (operating cash flow ÷ revenue) in the low teens once they hit scale. Services businesses with heavy work-in-progress or long payment terms often run lower.
Compare yourself to peers, normalize for one-offs, and watch the trend over time. Consistency matters more than hitting a specific number in any single period.
How do I normalize OCF for one-time items so I get a cleaner trend?
Create an "adjusted OCF" view that backs out unusual events (things like legal settlements, large prepayments, or one-time vendor credits). Tag these items in your general ledger, document clear criteria for what you'll include or exclude, and track both GAAP OCF and adjusted OCF side-by-side.
This approach helps you spot real trends without accidentally slipping into financial window dressing.
What early warning signals suggest OCF will deteriorate next quarter?
Watch for these leading indicators:
- DSO rising (collections are slowing down)
- Inventory turns dropping
- Payables aging compressing (you're paying vendors faster than before)
- Growing mismatch between billings and actual cash receipts
- Pipeline mix shifting toward customers with weaker payment histories
Any of these red flags signal you'll need to tighten cash management soon.
How should I forecast OCF without perfect direct-method data?
Model it from your core drivers. Start with revenue and gross margin, layer in expected non-cash items, then forecast working capital using DSO, DPO, and DIO assumptions tied to your seasonality.
Test scenarios like "what happens if DSO increases by 10 days" to understand how sensitive your runway is. Use these insights to set operating policies (credit terms, early-pay discounts) before cash gets tight, not after.
See your cash flow clearly
Operating cash flow shows if your startup works, not just if you look profitable. Understanding, calculating, and tracking OCF gives you the insight to make smart growth and hiring decisions, and keep cash worries away.
Traps like confusing OCF with other metrics, missing working capital swings, and ignoring seasonality are easy to avoid with the right tools. Automate OCF calculations and stay current, every period.
Runway connects your accounts, automates both OCF methods, and updates as your business evolves.
Want to see how it works? Book a demo.