5 Steps to Calculating Indirect Operating Cash Flow 

Operating cash flow refers to the cash you produce from your operations and business activities. If you use the indirect method to calculate it, you begin with your net income and then begin to add on depreciation and/or changes in receivables and inventory. Most businesses and investors prefer it over the direct method, which shows the inflows and outflows of your bank account.

 Operating Cash Flow Formula 

Operating Cash Flow =

Net Income (Revenue – Cost of Sales)

+ Depreciation

+/- Change in Working Capital

+/- Non-cash Transactions 

Five Steps you Need to Take to Calculate Indirect Operating Cash Flow:

Net Income 

Calculate your net income, which is a simple measure of your revenues minus expenses, interest, and taxes. You can look at the accrual net income figures on your income statement to do so. 

Non-Cash Expenses

Non-cash expenses do not involve a cash payment and reduce earnings rather than cash flow. These may include depreciation, amortization, or things like prepaid expenses. Take your non-cash expenses and add them back in. 

Working Capital

Working capital is the money you have to meet your current, short-term obligations. It’s your current assets minus your current liabilities. Look at accounts receivable, inventory, accounts payable, and other changes in your working capital. This can give you an idea of how much of your cash flow differs from your net income. 

Other Non-Cash Expenses or Customer Deposits

Include any customer deposits or other non-cash expenses that you did not account for on your income statement. 

Operating Cash Flow

Now comes the tricky part. Use the formula and put everything together. Take your accrual net income plus depreciation and subtract your change in accounts receivable, change in inventory, and change in accounts payable. Then add any non-cash expenses and subtract any customer deposits.