Operating cash flow (OCF) is the cash generated by a business's core operations — before investing activities (CAPEX) and financing activities (debt repayment, equity). It equals net income adjusted for non-cash charges (depreciation, amortization) and changes in working capital. Positive and growing OCF is the strongest signal of business health for lenders.
Operating cash flow is reported on the cash flow statement (Statement of Cash Flows) under 'operating activities.' The indirect method — most common — starts with net income and adjusts: add back non-cash charges (depreciation, amortization), add/subtract working-capital changes (increases in AR reduce OCF; increases in AP improve OCF), and account for other non-cash items. OCF is distinct from net income: a business can show accounting profits while burning cash (if receivables are growing faster than collections) or generate strong cash while showing thin accounting profits (if large depreciation creates non-cash charges). This disconnect is why lenders focus on cash flow rather than earnings. For small businesses without audited financials, lenders often estimate OCF from bank statements — deposits represent cash inflows, and the pattern of outflows approximates operating uses. This is why bank-statement underwriting (the basis for MCA and revenue-based financing) focuses on average daily balance and monthly deposit totals as proxies for operating cash flow. The Federal Reserve's Small Business Credit Survey (https://www.federalreserve.gov/publications/small-business-credit-survey.htm) documents how lenders use cash flow statements in underwriting small business credit. The FDIC's Consumer Resource Center (https://www.fdic.gov/resources/consumers/) provides guidance on how financial statements are used in business credit decisions.
Net income follows accrual accounting — it recognizes revenue when earned, not when collected, and expenses when incurred, not when paid. A business can show profit while running out of cash if customers don't pay promptly or if large non-cash charges (depreciation) distort the picture. Operating cash flow shows actual cash generated — the money available to service debt, pay employees, and reinvest. Lenders care most about cash, not accounting profit.
Free Cash Flow = Operating Cash Flow - CAPEX. FCF is the cash left over after maintaining and growing the asset base. OCF is the operating generation before capital investment. A business with $1M OCF and $800K annual CAPEX has only $200K FCF — very different from a business with $1M OCF and $100K CAPEX ($900K FCF). FCF is what's actually available for debt service, distributions, and growth.
MCA and revenue-based lenders use 3–6 months of bank statements to approximate operating cash flow. They look at: average monthly deposits (proxy for revenue collections), average daily balance (proxy for liquidity cushion), deposit consistency (seasonal vs. stable), and number of NSFs or overdrafts (signals of cash stress). This is why strong, consistent bank deposits — even without formal financial statements — can qualify a business for revenue-based financing.