Operating activities is the first and most important section of the cash flow statement: the cash generated (or consumed) by the core business itself — collecting from customers, paying suppliers and staff, settling taxes. Not borrowing, not asset sales — the engine, isolated.
What belongs in the section
Inflows: cash collected from customers, interest and dividends received. Outflows: payments to suppliers and employees, rent, taxes, interest paid. The other two sections take the rest: buying or selling long-term assets is investing (that is where Capital Expenditures (CapEx) lives); borrowing, repaying and dividends are financing.
The indirect method — net income to cash
Nearly all companies present operating cash by reconciling from profit:
- Start with net income.
- Add back non-cash charges — depreciation and amortization reduced profit but consumed no cash.
- Adjust for working capital: receivables grew? Subtract (sales not yet collected). Inventory grew? Subtract. Payables grew? Add (bills not yet paid).
A firm earning $500K with $80K depreciation, receivables up $120K and payables up $40K reports operating cash of $500K + 80K − 120K + 40K = $500K — coincidentally equal to profit here, but the moving parts show exactly where profit and cash diverge.
Why analysts read this section first
Profit involves estimates and accruals; operating cash flow is harder to decorate. Years of positive net income with weak or negative operating cash is the classic pattern of aggressive revenue recognition or ballooning receivables — the section is where paper profits go to be tested. Pair it with the runway math in the burn & runway calculator for early-stage companies.
Is interest paid an operating activity?
Under US GAAP, yes — interest paid and received both sit in operating. IFRS allows more flexibility in classification.
Why is depreciation added back?
It reduced net income but no cash left the building — the cash went out years ago when the asset was bought (an investing outflow).
What does negative operating cash flow mean?
The core business consumes cash. Normal for early-stage growth; alarming for a mature company reporting profits.