When it comes to understanding the health of a company, understanding the finances plays a vital role. Operating cash flows and net income are two of the most frequently used terms that are discussed and referred to, while discussing financial statements. To know what the terms represent, it is best to recognize and answer the question: what is the Difference Between Net Income And Cash Flow ?
Most business owners have no knowledge about such financial terms, which is why they are unable to make the right decisions for their organizations or capture the right funds from investors.
To overcome this situation, it is better to understand what they are so that executives can start making better decisions and improve their overall finances as well.
What is the Difference Between Net Income and Cash Flow?
The difference between net income and cash flow is simple. To get a better understanding of these two terms, it is best to look at their definitions first.
1) Net Income
The total earnings of a business after taking out the taxes, operational expenses, and costs of all the goods sold is defined as the net income. In a financial statement, multiple net incomes are mentioned. This means that there will be a value for quarterly, half year, and full year’s values of net income present in the statement.
Even though most investors tend to look at the value of net income to understand the worth of an organization they are about to invest in, net income may not be the best variable to consider. This is because there is a chance that a company may make a big sale or sell out some of their assets. As a result, the value of net income appears to be bigger in the quarterly term despite being completely different in the yearly value of net income.
2) Cash Flow
The total amount of cash and things equating to cash i.e. shares being transferred to and from the business is called cash flow. The money that has been spent from the business is called cash outflow while money received by the business is called cash inflow. In most cases, cash flow refers to the amount of cash that is left behind after providing for different business expenditures.
3) Operating Cash Flow
The total amount of cash that is generated by a company through their business i.e. selling of services/products is called operating cash flow. It is one of the most important value to determine whether a company is in loss or going towards profits. It helps an organization understand whether they need to find more capital for their business or they are generating enough capital on their own to run the business through the next fiscal year. In a cash flow statement, the value of operating cash flow is always presented at the top.
Difference Between Net Income and Cash Flow
It becomes difficult to understand the difference between net income and cash flow. When talking about the cash flow, the income statement normally refers to the amount of cash or other things that determines the amount received or given.
On the other hand, net income shows the actual profit of the organization. This means that the value of net income is determined after deducting the amount of taxes from the total income as well as the costs from all other expenses that happened during the fiscal year. Moreover, net income is present at the bottom of the financial statement, whereas, the cash flow is usually present in the beginning.
Difference Between Net Income and Operating Cash Flow
Contrary to popular belief, investors do not like to indulge themselves with the value of net income while trying to make a decision related to the organization’s financial health. Instead, they look at the number presented through the operating cash flow. This number helps in determining whether investments in the organization are worth it or not. As defined above, operating cash flow helps in determining the total amount of cash in and out during the various operations of an organization.
Getting into the world of business is complicated. From the outside things seem all nice and dandy but there are numerous factors that come into play when trying to make a business successful. Terms such as net income, cash flow, operating cash flow may seem straightforward but they are not as simple as it seems. It is especially important to have a clear picture about understanding what the difference is between cash flow and net income. Through these values, you can make informed decisions for the future of your company finances.
Q1. Which Companies Have Positive Cash Flows and Negative Net Income?
Most organizations tend to show their net income lower than original ones. This is because a positive cash flow and negative net income indicates that a company is liquid but the overall liquid assets of the organization are growing.
Q2. How are Net Income and Free Cash Flow Being Computed?
The most commonly used formula to compute free cash flow is to subtract capital expenditures from the operations cash.
FCF = Cash (operations) – Capital Expenditures
Net income is calculated by subtracting cost of goods sold and expenses from revenue. Here is the formula to do so:
Net Income = Revenue – Cost of Goods Sold – Expenses
Q3. Why Is Net Income Not Equal To Cash Flow?
Net income does not equal cash flow because they are two different things. As explained above, net income is the total amount of profit or earnings that are left behind after all the expenses, operation costs, and taxes. On the other hand, cash flow is the amount in cash left behind after all the cash inflows or outflows from the organization.
Q4. Does Positive Cash Flow Mean a Business Is Profitable?
If the cash flow is positive then it means that the cash inflow of your organization is higher than your outflow. It simply indicates that the business is moving towards the profitable scale.