Indirect Cash Forecast

The indirect method of forecasting operating cash flow begins with accrual net income, then strips out the non-cash and timing effects hiding inside it. Depreciation lowered net income but never cost cash, so it is added back. Changes in working capital capture the cash tied up or released as $OCF = NI + Depreciation - \Delta AR - \Delta Inventory + \Delta AP$, where an increase in accounts receivable or inventory uses cash, and an increase in accounts payable is a source of cash.

Reading each term: depreciation is a non-cash expense, so it goes back in. An increase in accounts receivable means revenue was booked but not yet collected, so it uses cash and is subtracted. An increase in inventory means cash was spent stocking up, also subtracted. An increase in accounts payable means bills have not yet been paid, freeing cash, so it is added. With NI $500{,}000$, Depreciation $120{,}000$, $\Delta AR = +80{,}000$, $\Delta Inventory = +40{,}000$, and $\Delta AP = +30{,}000$: $OCF = 500{,}000 + 120{,}000 - 80{,}000 - 40{,}000 + 30{,}000 = 530{,}000$.