Cash Flow vs Net Income

Cash Flow vs Net Income

See Also:
Operating Income (EBIT)
Free Cash Flow Analysis

Cash Flow vs Net Income

What is Cash Flow?

Cash flow is the blood of a business. It is the measure of what cash is coming in and what is leaving. Cash flow is a more accurate measure of whether a company has enough capital to sustain itself. For example, a company can be extremely profitable and still go out of business due to poor cash flow.
In planning a new business, cash flow is still a very important concept to focus on. Different services and habits affect cash flow. For example, a company’s payment terms greatly affect the amount of cash flowing in and out of a business. If it gives terms that are long, the business could have trouble meeting its other financial obligations. If the terms are short, it can give the business terrific cash flow.
The difference in length of terms comes down to the sizes of accounts receivable and inventory. If a business’s accounts receivable is high relative to its revenue, it is a sign of cash flow problems. Furthermore, if a company has a large inventory account, it can also be a sign of poor cash flow. A large inventory could show a purchasing problem that siphons cash faster than it is needed. Either way, if a business has too much tied up in inventory, it causes cash flow problems. The balance sheet and income statement might show a profit, but cash flow shows whether a business can sustain itself.

[button link=”” bg_color=”#eb6500″]Download The 25 Ways to Improve Cash Flow[/button]

Cash Flow Statements

Cash flow statements are broken down into three areas. The areas are operating activities, investing activities, and financing activities. The idea behind separating these sources of cash is to get a better idea of where the cash is coming from. A detailed cash flow statement shows what amount came from loans, products/services, and investments. This can be very useful to investors and lenders.

What is Net Income?

Net income is calculated by subtracting total expenses from revenue. This is the ‘profit’ that most people refer to. Within the total expenses to be subtracted from revenue, overhead and cost of goods/services are both included. This means that net income is the measure of whether a company actually made money during a period. Due to accrual accounting, net profit does not automatically mean a business has cash. However, net income is efficient at tracking business done within a period. This makes net income a better estimate of profitability than cash flow.
For more tips on how to manage your cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

Cash Flow vs Net Income
[box]Strategic CFO Lab Member Extra
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs[/box]

Cash Flow vs Net Income


Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »

The Dreaded “F” Word

See Also: What is Factoring Receivables Accounting for Factored Receivables Journal Entries for Factored Receivables Can Factoring Be Better Than a Bank Loan? History of Factoring How Factoring Can Make or Save Money Factoring is Not for My Company The What, When, and Where About Factoring Working Capital Factoring: The Dreaded “F” Word The dreaded

Read More »

Strategy for Managing Cash

Does your company have a strategy for managing cash?  Many companies have established procedures for purchasing materials, collecting customer payments, and paying vendors. But often people either do not communicate these procedures or simply don’t follow them consistently. Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow.  Know How to Manage

Read More »


Financial Leadership Workshop

MARCH 28TH-31ST 2022


Financial Leadership Workshop


August 7-10th, 2023

WIKI CFO® - Browse hundreds of articles
Skip to content