For founders steering startups, agencies, or e-commerce ventures, understanding your company’s operating cash flow is a cornerstone for smart financial decision-making. Knowing how to calculate operating cash flow and interpret its movements can dramatically improve your cash management, funding strategies, and path to profitability.
This guide is designed specifically for founder-operators who want straightforward, actionable insights — not complex accounting jargon — to help your company thrive.
What Is Operating Cash Flow and Why It Matters for Founders
At its core, operating cash flow (OCF) represents the actual cash generated by your company’s core business operations over a period, typically monthly or quarterly. Unlike net income, which includes non-cash charges like depreciation or accounting adjustments, OCF shows the cash flowing in and out from your principal activities such as sales revenue, supplier payments, salaries, and rent.
Key reasons founders should prioritize understanding OCF:
Liquidity insight: It reveals whether your business operations alone generate enough cash to sustain and grow the company without relying on external financing.
Cash runway planning: Especially critical for startups, OCF helps you forecast how long your cash reserves will last under current operations.
Investor communication: Investors and lenders often scrutinize operating cash flow to evaluate business health more realistically than earnings alone.
Operational efficiency: Tracking OCF trends can highlight inefficiencies or cash flow bottlenecks, empowering you to make targeted operational improvements.
To gain a foundational understanding of cash flow statements generally, you can also explore our How to Read a Cash Flow Statement guide.
How to Calculate Operating Cash Flow: Step-by-Step for Startups and Agencies
Calculating operating cash flow in practice depends on the financial data you have at hand. While you can derive OCF from the cash flow statement directly, many startups and small businesses prefer calculating it from their income statement and balance sheet. Here’s a founder-friendly method known as the indirect method, which adjusts net income by changes in working capital and non-cash expenses.
Step 1: Start with Net Income
Pull your net income figure from the income statement for the period you’re evaluating. Net income is your bottom-line profit or loss after accounting for all revenue, expenses, interest, and taxes.
Step 2: Add Back Non-Cash Expenses
Certain expenses reduce net income but do not require cash outlay. The most common is depreciation and amortization. Add these back because they lower profit without impacting cash.
Example non-cash expenses to add back may include:
Depreciation of equipment or property
Amortization of intangible assets
Stock-based compensation (often non-cash)
Step 3: Adjust for Changes in Working Capital
Working capital represents the difference between current assets and current liabilities. Changes in working capital items affect your cash flow but are not captured in the income statement. Here’s what to consider:
Increase in accounts receivable (A/R): More money owed by customers means cash not yet received; subtract the increase.
Decrease in accounts receivable: Cash collected; add the decrease.
Increase in inventory: More cash tied up in stock; subtract increase.
Decrease in inventory: Less stock held means releasing cash; add decrease.
Increase in accounts payable (A/P): You owe more suppliers; this preserves cash, so add the increase.
Decrease in accounts payable: Paying down suppliers uses cash; subtract the decrease.
Step 4: Account for Other Operating Activities
Some operating activities involve cash but may not appear directly on the income statement. For example:
Deferred revenue (cash received before services delivered) increases cash flow; add increases.
Other accrued liabilities or prepaid expenses may require adjustments based on their changes.
Simple Formula Recap
Operating Cash Flow =
Net Income
+ Non-Cash Expenses
+ Decrease in Working Capital
- Increase in Working Capital
Practical Example for a Startup Founder
Consider a SaaS startup with the following figures for Q1:
Item | Amount (USD) |
Net Income | $50,000 |
Depreciation & Amortization | $10,000 |
Increase in Accounts Receivable | $5,000 |
Increase in Inventory | $2,000 |
Increase in Accounts Payable | $3,000 |
Step-by-step OCF calculation:
Start with net income: $50,000
Add back depreciation/amortization: $50,000 + $10,000 = $60,000
Subtract increase in A/R: $60,000 - $5,000 = $55,000
Subtract increase in inventory: $55,000 - $2,000 = $53,000
Add increase in A/P: $53,000 + $3,000 = $56,000
Operating Cash Flow = $56,000
Related Financial Metrics Founders Track Alongside OCF
When mastering how to calculate operating cash flow, it’s valuable to understand related financial measurements that founders often track:
Free Cash Flow (FCF)
Cash Conversion Cycle (CCC)
EBITDA
For authoritative guidance on managing business cash flow effectively, visit the SBA’s Cash Flow Management Guide.
Troubleshooting Common Operating Cash Flow Mistakes
Even with correct calculation, misinterpretation can lead to poor decisions. Founders should be cautious about:
Ignoring seasonality
Overlooking one-time items
Confusing net income with cash generated
Neglecting changes in working capital
Misclassifying cash flows
For tactical steps to help optimize OCF, see our blog on Effective Cash Management Strategies for Founders.
How Haven Helps You Track and Improve Operating Cash Flow
As founders ourselves, we built Haven to support the unique financial needs of startups, agencies, and e-commerce businesses. Our modern bookkeeping, tax filing, and R&D tax credit services come with a deep founder-friendly focus—providing not just numbers, but actionable clarity on your operating cash flow and funding runway.
Explore our tailored financial services on our Services page.
Making Operating Cash Flow Work for Your Startup’s Growth
Mastering how to calculate operating cash flow empowers founders to look beyond surface-level profits and grasp the true liquidity engine that underpins their business. But the real value comes from turning that understanding into action — using operating cash flow as a lens for hiring decisions, reinvestment timing, and the day-to-day choices that keep your business financially steady as it grows.
As you scale, revisit this metric often. Track patterns, spot pressure points early, and connect cash flow signals to broader strategy — from pricing shifts to operational efficiency improvements. When operating cash flow becomes a regular part of how you evaluate performance, it strengthens every decision you make and gives your startup a more predictable, confident growth path.