Operating Cash Flow
Cash generated by a business's day-to-day operations, excluding investing or financing activity. OCF = Net Income + D&A + changes in working capital. Measures how much cash operations actually generated.
In practice
Operating cash flow is the financial 'pulse.' A business can be profitable on paper and still have a cash-flow problem. Negative OCF means the business is burning cash — even if the P&L looks good. Three straight months of negative operating cash flow is a red flag.
Common misconception
'OCF = revenue - expenses.' No. OCF accounts for changes in working capital. Bought $28K of inventory that hasn't sold yet? Profit shows an asset — OCF shows a cash outflow. A critical distinction for a store carrying a lot of inventory.
How to fix it
Negative OCF? (1) Check inventory days — how long is stock sitting? Reduce it with promotions, (2) Check receivables — B2B customers paying late? Shift payables, (3) Check payables — are you paying suppliers too quickly? Manage net terms, (4) Cut fixed costs — negative OCF plus high overhead is dangerous.
Example
D2C store: net profit $12.5K/month on paper. OCF: -$22K/month. Reason: bought $55K of summer inventory (cash went out) — $43K still unsold. Bank balance falls despite 'profitability.' Fix: inventory financing for peak season + lowering safety stock.
Priority
Track OCF monthly alongside your P&L. Quick Ratio = (Cash + Receivables) / Current Liabilities. Below 1 is risky. Above 1.5 is healthy. Quick Ratio gives a fast signal on cash health.
Related terms
Keep learning. Metrics that touch the same area:
- Cash FlowFinanceThe movement of cash in the business. 'Profitable on paper, broke in the bank' — a common problem in growing stores.
- Working CapitalFinanceThe difference between current assets (cash, inventory, receivables) and current liabilities (payables, short-term credit). A liquidity metric — the business's ability to fund day-to-day operations. Positive working capital = healthy.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
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