Finance fundamentals
Cash Flow Formulas
The two formulas you'll use most: Operating Cash Flow = Net Income + Non-Cash Expenses + Changes in Working Capital, and Free Cash Flow = Operating Cash Flow − Capital Expenditures. Together they tell you how much cash your business actually generates and how much is genuinely free to use.
These formulas turn the cash flow statement into numbers you can act on. Each one below includes the formula, a worked example, and what a good result looks like.
Operating Cash Flow (OCF)
Net Income + Non-Cash Expenses + Changes in Working Capital
$40,000 net income + $5,000 depreciation + $3,000 AP increase − $2,000 AR increase = $46,000
Cash generated by core operations. The single most important measure of business health.
Free Cash Flow (FCF)
Operating Cash Flow − Capital Expenditures
$46,000 OCF − $20,000 equipment purchase = $26,000 free cash flow
Cash left after required investments. Available to repay debt, pay owners, or build reserves.
Net Cash Flow
Operating + Investing + Financing Cash Flow
$46,000 − $20,000 (investing) − $8,000 (financing) = $18,000 net increase in cash
Total change in your cash balance over the period. Ties to the cash flow statement.
Cash Flow Margin
Operating Cash Flow ÷ Revenue × 100
$46,000 OCF ÷ $200,000 revenue × 100 = 23% cash flow margin
How efficiently revenue turns into cash. Above 15% is healthy; above 20% is strong.
How to calculate operating cash flow step by step
The indirect method — used by most small businesses and accounting software — starts from net income and adjusts to cash:
| Start: Net income | $40,000 | From your income statement |
| + Depreciation & amortization | +$5,000 | Non-cash expense — add it back |
| − Increase in accounts receivable | −$2,000 | Revenue earned but not yet collected |
| − Increase in inventory | −$1,000 | Cash tied up in stock |
| + Increase in accounts payable | +$3,000 | Expenses incurred but not yet paid |
| = Operating Cash Flow | $45,000 | Cash from operations |
Frequently asked questions
What is the operating cash flow formula?+
Operating Cash Flow (OCF) = Net Income + Non-Cash Expenses + Changes in Working Capital. Using the indirect method: start with net income, add back depreciation and amortization, then adjust for changes in accounts receivable, inventory, and accounts payable. A simpler version: OCF = Net Income + Depreciation/Amortization − Increase in AR − Increase in Inventory + Increase in AP.
What is the free cash flow formula?+
Free Cash Flow (FCF) = Operating Cash Flow − Capital Expenditures. It measures the cash left after a business pays for the investments needed to maintain and grow operations. For example, $80,000 operating cash flow minus $20,000 in equipment purchases = $60,000 free cash flow available to pay down debt, distribute to owners, or save.
What is the net cash flow formula?+
Net Cash Flow = Cash Inflows − Cash Outflows, or equivalently: Operating Cash Flow + Investing Cash Flow + Financing Cash Flow. It's the total change in your cash balance over a period. Positive net cash flow means your cash grew; negative means it shrank — even if you were profitable on paper.
What is a good cash flow margin?+
Cash Flow Margin = Operating Cash Flow ÷ Revenue × 100. It shows how efficiently revenue converts to cash. A margin above 10-15% is generally healthy for small businesses; above 20% is strong. A low or negative cash flow margin despite positive profit usually signals collection problems (customers paying slowly) or heavy inventory buildup.
How do you calculate cash flow from net income?+
Start with net income, then: (1) add back non-cash expenses like depreciation and amortization, (2) subtract increases in current assets (accounts receivable, inventory), (3) add increases in current liabilities (accounts payable, accrued expenses). This is the indirect method and gives you operating cash flow. Then add investing and financing cash flows for total net cash flow.
What is the difference between operating cash flow and free cash flow?+
Operating cash flow is the cash generated by core business operations before any spending on long-term assets. Free cash flow subtracts capital expenditures (equipment, property) from operating cash flow — it's what's actually left over. A business can have strong operating cash flow but low free cash flow if it's investing heavily in growth.
Can cash flow be positive while profit is negative?+
Yes. A business can show a net loss on the income statement but positive cash flow if it collected on old receivables, took a loan, or had large non-cash expenses like depreciation. The reverse is also common: positive profit but negative cash flow when customers pay slowly or the business buys inventory in bulk. This is why both numbers matter.
Related guides and tools
The three sections — operating, investing, financing — explained with examples.
Why profit and cash flow differ, and why both matter.
The income statement that feeds net income into these formulas.
Project ending cash and runway over the next 12 months.
Measure the liquidity that drives changes in operating cash flow.
How many months of cash you have left at your current burn rate.