Operating cash flow is an essential financial metric that measures a company’s ability to generate cash from its operations. It provides insights into how much cash a business has available to reinvest in its operations, pay off debts, or distribute to its shareholders. In this blog post, we will walk you through the steps of how to calculate operating cash flow and provide examples to help you understand the concept better.

## Step 1: Calculate Net Income

The first step in calculating operating cash flow is to determine the net income of the business. Net income is the difference between a company’s total revenue and its total expenses over a specific period, typically a year. It is calculated by subtracting all of the expenses from the total revenue. The formula for net income is as follows:

**Net Income = Total Revenue – Total Expenses**

*For example, if a company’s total revenue is $1,000,000, and its total expenses are $750,000, then the net income would be:*

*Net Income = $1,000,000 – $750,000*

*Net Income = $250,000*

## Step 2: Add Back Non-Cash Expenses

The second step in calculating operating cash flow is to add back non-cash expenses to the net income. Non-cash expenses are expenses that do not require the use of cash, such as depreciation and amortization. These expenses are added back because they do not impact the company’s cash position. The formula for adding back non-cash expenses is as follows:

**Operating Cash Flow = Net Income + Non-Cash Expenses**

*For example, if a company’s net income is $250,000, and its non-cash expenses are $100,000, then the operating cash flow would be:*

*Operating Cash Flow = $250,000 + $100,000*

*Operating Cash Flow = $350,000*

## Step 3: Adjust for Changes in Working Capital

The third and final step in calculating operating cash flow is to adjust for changes in working capital. Working capital is the difference between a company’s current assets and current liabilities and represents the company’s short-term liquidity. A decrease in working capital means that a company has received more cash than it has spent, while an increase in working capital means that a company has spent more cash than it has received.

To adjust for changes in working capital, the formula is as follows:

**Operating Cash Flow = Net Income + Non-Cash Expenses +/- Changes in Working Capital**

*For example, let’s say that a company’s net income is $250,000, its non-cash expenses are $100,000, and its changes in working capital are -$50,000. The operating cash flow would be:*

*Operating Cash Flow = $250,000 + $100,000 – $50,000*

*Operating Cash Flow = $300,000*

In this example, the company’s operating cash flow is $300,000, which means that it generated $300,000 in cash from its operations. This amount can be used to reinvest in the business, pay off debts, or distribute to shareholders.

In conclusion, calculating operating cash flow is a crucial step in analyzing a company’s financial health. It provides insights into a company’s ability to generate cash from its operations, which is essential for growth and sustainability. By following the three steps outlined above and using the examples provided, you can calculate operating cash flow for any business and make more informed investment decisions.