Operating Cash Flow vs. Net Operating Income: An Overview
Net operating income and operating cash flow are different metrics used in measuring the financial viability of an investment or a company. The value of these financial measures are usually considered before taxes.
Key Takeaways
- Net operating income is a measure of profitability in real estate—the amount of cash flow a property generates after expenses.
- Operating cash flow is the money a business generates from its core operations.
- Net operating income is generally the same as operating income for a company.
- Operating income is often referred to as earnings before interest and taxes (EBIT), although the two may differ at times.
Net Operating Income
Net operating income (NOI) is a profitability metric typically used in real estate to measure a property’s profit potential. Net operating income measures the amount of cash flow that a property generates after all expenses have been deducted or have been paid.
Investors use NOI to determine whether a property is a good investment, while creditors use NOI to determine whether the property is a good credit risk. Net operating income includes rental income, as well as any other sources of income including parking and service fees, such as vending, and laundry machines.
When calculating NOI operating expenses are deducted from the property's total income. Those expenses can include the costs of running and maintaining the building and the grounds, such as insurance, property management fees, legal fees, utilities, property taxes, repairs, and janitorial fees.
Operating Cash Flow
Operating cash flow measures the cash that a company generates from its daily core business or operations. Operating cash flow is also known as cash flow from operations and is reported on the corporate cash flow statement.
Operating cash flow is calculated by subtracting operating expenses from total revenue. In short, it measures how much cash flow is generated from a company's main business by excluding any other sources of income, such as capital gains from investments. Cash flow from operations is important because it shows how successful a company’s primary business is performing.
Investing and financing transactions, such as borrowing, buying capital equipment and making dividend payments, are excluded from operating cash flows and are reported separately.
Special Considerations
The net operating income calculation can also be referred to simply as operating income when it comes to determining the financial health of a company.
Operating income is a company's profit after operating expenses are deducted from total revenue. Operating income shows the amount of profit a company generates from its operations without interest or tax expenses. Operating income is calculated by taking gross income and subtracting operating expenses, which include selling, general and administrative expenses (SG&A), depreciation and amortization.
Since operating income excludes taxes and interest expenses, it is often referred to as earnings before interest and taxes (EBIT). However, there are times when operating income can differ from EBIT.
FAQs
Net Income is the result of revenues minus the expenses, taxes, and costs of goods sold (COGS). Operating cash flow is the cash generated from operations, or revenues, less operating expenses. Many investors and analysts prefer using operating cash flow as an indicator of a company's health.
Is net operating income the same as operating cash flow? ›
Net operating income is a measure of profitability in real estate—the amount of cash flow a property generates after expenses. Operating cash flow is the money a business generates from its core operations.
Why is operating cash flow different from net income? ›
Cash flow from operating activities is the absolute cash that an organisation gets, while the net income or net gain is income minus the costs, like the expense of undertaking the business, depreciation, taxes, compensations, interests, and other different costs.
What is the difference between income statement and cash flow from operating? ›
The cash flow statement helps to know the solvency and liquidity of a business, which will help to determine the present as well as future cash flows. The income statement helps to determine the profitability of a company during a particular financial year.
What is the difference between operating revenue and cash flow? ›
Key Takeaways. Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator.
What is the difference between cash flow and NOI? ›
Cash flow is the difference between all the money coming in and going out, including loan payments. So, while NOI shows if a property is doing well on its own, cash flow tells you how much cash you actually get after all payments.
What does operating cash flow tell you? ›
Operating cash flow (OCF) is a measure of the amount of cash generated by a company's normal business operations. Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.
What's the difference between free cash flow and net income? ›
Free cash flow (FCF) is a measure of a business's profitability, but is not equivalent to overall net income. Net income is the amount of profit that a company has reported over a certain time period.
Is it possible to have positive cash flow and negative net income? ›
Yes, there are times when a company can have positive cash flow while reporting negative net income.
How to calculate cash flow from net income? ›
Free Cash Flow = Net income + Depreciation/Amortization – Change in Working Capital – Capital Expenditure. Net Income is the company's profit or loss after all its expenses have been deducted.
A cash flow statement shows the exact amount of a company's cash inflows and outflows over a period of time. The income statement is the most common financial statement and shows a company's revenues and total expenses, including noncash accounting, such as depreciation over a period of time.
Which is more important, cash flow or income statement? ›
But if the decision you need to make has to do with, for example, the amount of debt obligation your business can safely take on, you will find the cash flow statement more helpful. The cash flow statement and income statement are just two critical tools in managing your business.
How much would you pay for a company that generates $100 of cash flow every single year into eternity? ›
In this case, if the cash flow is $100 and the discount rate is 5%, the present value would be $100 / 0.05 = $2000. 3. Therefore, based on a discount rate of 5%, you would pay $2000 for a company that generates $100 of cash flow every year into eternity.
Why is operating cash flow better than net income? ›
In the long run, high operating cash flow brings a stable net income rise, though some periods may show net income decreasing tendency. Constant generation of cash inflow is a more important indicator of a company's viability and strength than net income.
What is a healthy cash flow? ›
A healthy cash flow ratio is a higher ratio of cash inflows to cash outflows. There are various ratios to assess cash flow health, but one commonly used ratio is the operating cash flow ratio—cash flow from operations, divided by current liabilities.
What is cash flow for dummies? ›
Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time, and can be used to measure rates of return, actual liquidity, real profits, and to evaluate the quality of investments.
What is net operating income also known as? ›
Total gross income - Operating expenses = Net operating incomeBusinesses outside the real estate industry often refer to net operating income as earnings before interest and taxes (EBIT ). EBIT includes the same types of revenue and expenses in its calculation as net operating income without property specificity.
How do you calculate operating cash flow from net income? ›
How to calculate the operating cash flow formula
- Operating cash flow = total cash received for sales - cash paid for operating expenses.
- OCF = (revenue - operating expenses) + depreciation - income taxes - change in working capital.
- OCF = net income + depreciation - change in working capital.
Key Takeaways
Operating profit is a company's profit after all expenses are taken out except for the cost of debt, taxes, and certain one-off items. Net income is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales.
Is net income the same as free cash flow? ›
Free cash flow (FCF) is a measure of a business's profitability, but is not equivalent to overall net income. Net income is the amount of profit that a company has reported over a certain time period.
