Net Income vs. Operating Cash Flow: An Overview
Financial statements provide a wealth of information about a company and its operations. Many investors, analysts, and creditors refer to a firm's net income and operating cash flows to understand how well a company has performed and used its cash in operations. Net income, also known as the bottom line, is just as its name implies. It is the remaining income—or revenues—after deducting expenses, taxes, and costs of goods sold (COGS). Operating cash flow (OCF) is the amount of cash generated from operations, and is calculated by subtracting operating expenses from revenue.
Key Takeaways
- 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.
- Net income is important to investors and analysts but does not necessarily provide a complete picture of a company's development.
Net Income
Net income is earned revenues minus incurred expenses, including taxes, and costs of goods sold (COGS). It follows gross income and operating income and is the final income number in a monthly, quarterly, or annual report. A net income statement is important for potential investors and creditors, but it does not always show the company's actual development. For instance, after a high, one-time asset sale, monthly net income may be higher than operating income, followed by a much lower quarterly net income.
Operating Cash Flow
Operating cash flow is calculated by subtracting operating expenses from revenue. The operating cash flow reports inflows and outflows as a result of regular operating activities. It is the cash from revenues generated by business activities, excluding non-operating sources (e.g., investments and interest). The best demonstration of operating cash flow is the cash cycle, which converts accrual accounting-based sales into cash.
Key Differences
Cash flow and net income statements are different in most cases because there is a time gap between documented sales and actual payments. If invoiced customers pay in cash during the next period, the situation is under control. If the payments are postponed further, there is a larger difference between net income and operative cash flow statements. If the trend does not change, the annual report may demonstrate equally low total cash flow and net income.
Usually, rapidly developing companies report low net income as they invest in improvement and expansion. 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. Cash flow is a better criterion and barometer of a company's financial health. Managers and investors can avoid many traps if they pay more attention to operating cash flow analyses.
FAQs
Net income, also known as the bottom line, is just as its name implies. It is the remaining income—or revenues—after deducting expenses, taxes, and costs of goods sold (COGS). Operating cash flow (OCF) is the amount of cash generated from operations, and is calculated by subtracting operating expenses from revenue.
What is the difference between net income and operating cash flow? ›
Namely, your net income represents the profitability of your business, while the cash flow will reveal how much cash you actually have on hand at a given time.
What is the difference between OCF and NCF? ›
Net Cash Flow vs. Operating Cash Flow. OCF helps businesses understand the amount of cash that their main business activities generate, but a different data point, net cash flow (NCF), is used when finance professionals want a more comprehensive view of a company's activity.
What's the difference between operating income and net income? ›
Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes. Operating expenses include selling, general & administrative expenses (SG&A), and depreciation and amortization.
What is the main difference between net income and cash inflows? ›
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 cash flow and cash income? ›
Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations. Net income is the starting point in calculating cash flow from operating activities.
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 cash flow and net cash flow Why might these two numbers differ? ›
Answer and Explanation:
Net cash flow is the sum of difference between cash come in and cash come out of a particular business for a specific period. On the other hand operating cash flow is used to measure the cash generated from the business operations of a company.
What is the difference between free cash flow and operating income? ›
Key Takeaways. Operating cash flow measures cash generated by a company's business operations. Free cash flow is the cash that a company generates from its business operations after subtracting capital expenditures.
What is the difference between free cash flow and net cash? ›
Free cash flow focuses on cash from operations minus capital expenditures. It measures how much cash is available for distributions after money invested to maintain or expand the business. Net cash flow looks at the total change in cash and cash equivalents based on all business activities.
DIFFERENCE IS TAXES: Operating income does NOT include taxes and net income does include taxes!!!!! Define contribution margin, contribution margin per unit, and contribution margin percentage.
What is a good profit margin? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
What is a good operating margin? ›
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
How does operating cash flow differ from net income? ›
Key Takeaways. 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.
What is the difference between cash flow and net revenue? ›
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 an important difference between net income and cash flow quizlet? ›
The difference between net income and net cash flow from operating activities exists because the shop is not selling all the inventory that it purchased during the period.
Is cash flow from operations the same as Noi? ›
Understanding the Difference between NOI and Cash Flow
NOI, or Net Operating Income, is about the money a property makes before paying loans. It looks at rental income minus operating costs like maintenance and fees. Cash flow is the difference between all the money coming in and going out, including loan payments.
Why is operating cash flow more important than net income? ›
Although many investors gravitate toward net income, operating cash flow is often seen as a better metric of a company's financial health for two main reasons. First, cash flow is harder to manipulate under GAAP than net income (although it can be done to a certain degree).
What is the difference between net cash and cash flow? ›
Net cash flow looks at the total change in cash and cash equivalents based on all business activities. It provides a comprehensive view of cash inflows and outflows. Cash flow more broadly refers to all cash coming into and flowing out of a business.
