Operating Cash Flow Explained Simply

Operating cash flow is one of the most important financial metrics of all—many professionals even describe it as the metric that most honestly reflects a company’s true financial health. While profits can be influenced by depreciation, valuation adjustments, or provisions, operating cash flow reflects the actual cash generated from day-to-day operations.

What is operating cash flow?

Operating cash flow measures the liquidity a company generates from its ordinary business activities. It is the surplus of cash inflows over cash outflows in the operating segment—excluding investments and financing activities.

In other words: Operating cash flow shows whether your company generates enough cash from its core business to cover investments, taxes, interest, and principal payments. It is therefore the most honest indicator of financial health.

Why is operating cash flow so important?

An old saying goes: Profit is opinion, cash is fact. This perfectly sums up the importance of operating cash flow. A company can be profitable on paper but still run into liquidity problems—for example, if customers take too long to pay or if inventory needs to be built up.

For SMEs, operating cash flow is therefore particularly relevant. It shows whether the business model is truly sustainable and whether sufficient funds are available for growth, debt repayment, or dividends. Banks and investors often consider operating cash flow more important than reported profit.

Calculating Operating Cash Flow

There are two methods for calculation: the direct and the indirect method. In practice, the indirect method is usually used because it can be derived directly from the existing income statement and balance sheet.

With the indirect method, you start with the annual profit and add back all non-cash expenses (particularly depreciation and increases in provisions). You then account for changes in working capital (accounts receivable, inventory, accounts payable).

A concrete example

Suppose your company has generated an annual profit of 100,000 Swiss francs. Depreciation amounted to 80,000 Swiss francs, and provisions were increased by 20,000 Swiss francs. Accounts receivable rose by 30,000 Swiss francs (more money tied up in receivables), and accounts payable rose by 25,000 Swiss francs (longer payment terms with suppliers were utilized).

Operating cash flow is calculated as follows: 100,000 + 80,000 + 20,000 – 30,000 + 25,000 = 195,000 Swiss francs. So despite an annual profit of only 100,000 francs, nearly twice as much actual cash flowed into the company—a very healthy picture.

What constitutes good operating cash flow?

As a general rule: Operating cash flow should be clearly positive and ideally higher than the reported profit. This is a sign of good operational quality. A cash flow to revenue ratio of at least 5 to 10 percent is considered healthy in many industries.

If operating cash flow remains significantly below profit over an extended period, caution is warranted. Possible causes: excessively long payment terms for customers, excessive inventory levels, or valuation adjustments that artificially inflate profit.

Operating Cash Flow vs. Free Cash Flow

A related term is free cash flow. It is calculated as operating cash flow minus investments in fixed assets. Free cash flow thus shows the money that is actually available for distributions, debt repayment, or further strategic investments. For a comprehensive analysis, you should keep both metrics in mind.

Findea is happy to support you in analyzing and sustainably improving your cash flow—through optimized accounts receivable management, efficient inventory management, and strategic liquidity planning.

The complete guide at a glance

This article is part of our comprehensive series on the most important financial metrics for Swiss SMEs. In the complete guide to the 10 most important financial ratios for SMEs, you’ll find all the ratios at a glance—from profitability and liquidity to financing structure.

Formula: Operating Cash Flow (indirect method)

Operating Cash Flow = Net Income + Depreciation + Provisions ± Δ Working Capital

Δ Working Capital = Change in Accounts Receivable, Inventory, and Accounts Payable