What is Operating Cash Flow (OCF)?

Operating Cash Flow (OCF) is the money your organisation makes from its main activities, not including the costs of borrowing money or making investments. It tells you if your daily business operations make enough money to pay for running costs and help the business develop.

OCF looks at actual cash coming in and going out, while profit numbers on your income statement look at profits. If clients haven't paid their bills yet, you could display a profit on paper yet not have enough cash. OCF can show how much cash your business really has.

Why is operating cash flow important?

OCF tells you if your business strategy makes sense in terms of cash. A business may look like it's making money, but it may have trouble with cash flow if money comes in slowly or costs eat up cash faster than income comes in.

A 2026 UK Government report found that 38 businesses shut their doors every single day because they are not paid on time. The Federation of Small Businesses says that some 50,000 small businesses go out of business every year because they can't pay their bills on time.

If you know what OCF is, you can find problems early. If OCF goes down or becomes negative, it means that your business isn't making enough money, even if your accounting earnings are high.

What are cash flow operating activities?

Operating activities are the main transactions that bring in money and cost money on a regular basis. They show how transactions affect cash flow, which is how net profit is calculated.

Payments from customers for goods or services, royalties, fees, and commissions are all examples of cash inflows. Payments to suppliers, compensation for employees, rent, utilities, and taxes are all examples of cash outflows.

Financing activities (like taking out loans or issuing shares) and investment activities (like buying equipment or property) are not part of operating activities.

Operating Cash Flow vs Free Cash Flow

Free Cash Flow and Operating Cash Flow are two different things.

OCF shows how much cash is made by the main company activities. Free Cash Flow is the amount of cash you have left over after spending in sustaining and developing your asset base. It is calculated by taking OCF and subtracting capital expenditures.

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Your Free Cash Flow is £70,000 if your business makes £100,000 in OCF and invests £30,000 on new equipment. That money can be used to pay off debts, pay dividends, or build up savings.

OCF is all about making things run more smoothly. Free Cash Flow illustrates how much extra cash you have after making the necessary investments.

How to calculate operating cash flow

The direct approach and the indirect method are the two basic ways to figure out OCF. The indirect technique is used by most firms since it is easier and uses data from financial statements that are easy to find.

Operating cash flow formula

The indirect approach begins with net profit and makes changes for items that don't involve cash and changes in working capital:

Operating Cash Flow = Net Profit + Non-Cash Expenses - Increase in Working Capital

Where:

• Net Profit is the profit you make after expenses from the income statement
• Non-Cash Expenses are costs that lower earnings but don't utilise cash, such as depreciation and amortisation
• Changes in working capital include changes in accounts receivable, inventories, and accounts payable

The formula in greater detail looks like this:

OCF = Net Profit + Depreciation + Amortisation - Increase in Accounts Receivable - Increase in Inventory + Increase in Accounts Payable

Example calculation

These are the numbers for your business this year:

• Net profit: £80,000
• Loss of value: £15,000
• Accounts receivable went up by £25,000
• The stock went up by £10,000
• Accounts payable went up by £8,000

OCF = £80,000 + £15,000 - £25,000 - £10,000 + £8,000 = £68,000

Your business made £80,000 in profit, but only £68,000 in operating cash flow. The discrepancy arises from holding funds in receivables and inventory, which is partly made up for by delaying payments to suppliers.

Operating cash flow ratio

The operating cash flow ratio tells you how well you can pay off your present debts with cash from your business. The formula for it is:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Your ratio is 1.36 if your OCF is £68,000 and your current obligations are £50,000. This means that for every £1 of short-term debt, you make £1.36 in operating cash.

A ratio higher than 1.0 means that the business is making good money. If the number is less than 1.0, it could mean that it's hard to satisfy short-term obligations using just operational cash.

When you request funding, this ratio is important. Lenders want to know that your business makes enough money to pay off its debts and meet its other responsibilities.

How to improve operating cash flow

Speed up collections – Research from Intuit QuickBooks (2025) found that the average small business in the UK is owed £21,400 in late payments. Make loan terms stricter, follow up quickly, and provide people who pay early a reason to do so.

Talk to your suppliers about the terms of your contract - Longer payment terms can help your cash flow. For example, using supplier credit might mean paying in 60 days instead of 30. However, payment terms vary by supplier, so discuss your options directly with them to find terms that work for both parties.

Keep your inventory organised - so you don't have too much goods, which ties up cash. Look at things that aren't selling well and change your buying habits to meet demand.

Keep an eye on your spending - Regular reviews show you where you might save money. Subscription services and old contracts are frequently easy wins.

Boost your margins – better margins indicate more money per sale. You can do this by changing prices, cutting costs, or moving to products with better margins.

Managing your business cash flow

Coface's 2025 UK payment survey found that 90% of UK businesses have trouble getting paid on time, with an average wait of 32 days. Construction companies have to wait 38.2 days.

These delays provide gaps in cash flow that can put healthy businesses at risk. You still have to pay your employees, rent, and suppliers even if you haven't been compensated for the work you've done.

Funding Circle business loans give you working capital when your cash flow is low and you need money to grow.

You can get a decision in as short as one hour. Funds typically paid out within 48 hours . You can borrow between £10,000 and £750,000 for lengths of 6 months to 6 years.

Rates start at 6.9% per year, and the prices are clear and fixed. No costs for paying off early.

Strong cash flow can improve your chances of accessing finance. While lenders consider multiple factors including credit history, trading record, and profitability, consistent positive cash flow demonstrates financial stability and can help you negotiate better rates and terms.

More than 110,000 businesses in the UK trust us to help them achieve their business goals.

Are you ready to improve your financial flow?

19/05/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.