What is the Difference Between Operating Cash Flow and Net Income? (2024)

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 in a specific period.

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 a final 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

Total cash flow is the operative cash flow plus the net of the working capital of the company. The net of the working capital is the difference between assets and liabilities. The operative cash flow reports inflows and outflows as a result of regular operating activities. It is the cash from revenues, 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 more important for a company's success than accrual accounting. 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.

What is the Difference Between Operating Cash Flow and Net Income? (2024)

FAQs

What is the Difference Between Operating Cash Flow and Net Income? ›

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 in a specific period.

What is the difference between net income and operating cash flow? ›

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 cash flow and NOI? ›

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.

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.

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 operating and cash flow? ›

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. Operating cash flow tells investors whether a company has enough cash flow to pay its bills.

What is the difference between operating income and net income quizlet? ›

C) Net income takes into account income taxes, whereas, operating income does not take income taxes into account. Choose the three methods that can be used to express CVP relationships. Why is it more accurate to describe the subject matter of this chapter as CVP analysis rather than as breakeven analysis?

Why is operating cash flow better than net income? ›

Alternatively, net income is easier to manipulate, and companies can do this by increasing revenues or decreasing business costs. Since it's harder to manipulate, cash flow is typically a better metric with which to gauge a company's financial health.

Can operating cash flow be greater than net income? ›

There are several circ*mstances in which a company's free cash flow (FCF) could be consistently much higher than its net income. Some reasons include: Non-Cash Expenses: Net income includes non-cash expenses such as depreciation and amortization, which reduce profitability but do not impact cash flow.

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 level of government are we taxed by? ›

Federal income taxes are collected by the federal government, while state income taxes are collected by the individual state(s) in which a taxpayer lives and earns income.

What is a good operating income? ›

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.

What is included in operating cash flow? ›

Because most companies report the net income on an accrual basis, it includes various non-cash items, such as depreciation and amortization. Operating Cash Flow = Operating Income + Depreciation – Taxes + Change in Working Capital.

How can you be cash flow positive but not profitable? ›

If a company sells an asset or a portion of the company to raise capital, the proceeds from the sale would be an addition to cash for the period. As a result, a company could have a net loss while recording positive cash flow from the sale of the asset if the asset's value exceeded the loss for the period.

What is the operating cash flow from net income? ›

Operating cash flow (OCF) is how much cash a company generated (or consumed) from its operating activities during a period. The OCF calculation will always include the following three components: 1) net income, 2) plus non-cash expenses, and 3) minus the net increase in net working capital.

What is an important difference between net income and cash flow quizlet? ›

Net income does show the overall profitability or total profitability of the organization the cashflow shows the organizations financial condition more then say the net income would.

Is net income part of operating cash flow? ›

The OCF calculation will always include the following three components: 1) net income, 2) plus non-cash expenses, and 3) minus the net increase in net working capital.

Is cash flow better 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).

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