The indirect-method bridge, line by line: start at net income, add back the non-cash depreciation and amortization, then remove cash absorbed by (or freed from) working capital. The subtotal is operating cash flow.
Line
Adjustment
Running cash flow
Net income
starting point
$50,000
Add: depreciation & amortization
+$9,000
$59,000
Less: increase in working capital (cash tied up)
-$4,000
$55,000
Operating cash flow
subtotal
$55,000
Estimates only — not financial, tax, or professional advice.
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What it calculates: Operating Cash Flow, Adjustments to Net Income.
Updated 5 June 2026 · Transparent assumptions
Add back $9,000 that never left, subtract $4,000 that did
Net income of $50,000 is an accrual figure. Depreciation and amortisation of $9,000 reduced it without any cash leaving, so it is added back. Working capital rose by $4,000 — more cash tied up in receivables and inventory than released by payables — so it is taken out. The result is $55,000 of operating cash flow, $5,000 more than reported profit.
This bridge is the indirect method, and it is how nearly every cash flow statement is presented. Reading it in the order the adjustments appear tells you why profit and cash differ for this specific business, which is far more useful than either number alone.
Every extra dollar of sales on credit is a dollar of cash you have not received
Working capital is receivables plus inventory less payables, and it grows with the business. A company doubling its sales must carry roughly double the receivables and often double the inventory, and that increase is a cash outflow even though every sale was profitable. This is why fast-growing, profitable businesses routinely run out of money.
The direction of the adjustment is the thing to get right. An increase in working capital is a use of cash and reduces operating cash flow; a decrease releases cash and increases it. A business that suddenly reports strong cash flow because working capital fell sharply may simply have stopped growing, or may have stretched its suppliers — neither is the improvement it resembles.
Cash consistently below profit is the single most useful warning sign
Over any reasonable period, operating cash flow should be at least as large as net income for a healthy business, because depreciation adds back more than working capital typically absorbs. Here the ratio is 1.1, which is unremarkable and fine.
A ratio persistently below 1 deserves investigation. It usually means receivables or inventory are building faster than sales, which points at collection problems, channel stuffing, or obsolete stock carried at cost. Because revenue recognition is far easier to influence than cash collection, this comparison is one of the more reliable checks on earnings quality available from published statements.
Real statements carry more adjustments than three lines
A full cash flow statement adds back other non-cash items — stock-based compensation, deferred tax, impairments, provisions and gains or losses on asset sales — and separates the working-capital movement into its components. This calculator collapses all of that into one net figure, which is fine for a quick reconciliation and insufficient for analysis of a complex business.
Stock-based compensation in particular is worth noting: it is added back as non-cash, which it is, but it dilutes shareholders just as surely as paying cash would. Operating cash flow flattered by a large add-back of share compensation is not producing as much for shareholders as the figure suggests.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Free Cash FlowFree cash flow after capital expenditure, with capex shown as a share of operating cash flow.
Cash Conversion CycleWork out the days between paying suppliers and being paid by customers, on one consistent day basis, then see what each day is worth in cash.
Net ProfitThe full waterfall from revenue to net profit — COGS, operating expenses, interest and tax — with the margin at each step.
Profit MarginWork out gross, contribution, operating, and net margin, with target pricing, break-even, scenarios, and SKU comparison.
Results are estimates for planning and analysis based on the figures you enter. They are not accounting, tax, or financial advice — verify with your own records and a qualified professional before making decisions.
Published the calculator with its formula, worked example, assumptions, limitations and a bespoke guide, and added an automated formula test suite covering it.
Tested the direction of the working-capital adjustment, since an increase in working capital consumes cash and a sign error here would invert the result.
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