Cash Flow vs Net Income: Key Differences, Examples, and Analysis

Cash Flow vs Net Income: Why the Difference Matters

Two companies report the same net income. But one has cash to grow, and the other is borrowing to stay afloat. Why?

If you’ve ever assessed financial health using just the income statement, you’ve likely seen this disconnect. Cash flow and net income both measure performance, but they tell very different stories. Understanding how they differ — and connect — is key to analyzing profitability, sustainability, and value.

This guide unpacks the differences between cash flow vs net income and how analysts use both metrics to evaluate a company’s financial health.

Defining Cash Flow and Net Income

Net income is profit after all expenses — the “bottom line” of the income statement. It’s calculated by subtracting costs of goods sold (COGS), selling, general & administrative expenses (SG&A), depreciation and amortization, interest expense, taxes, and any other expenses from total revenue.

Cash flow tracks cash going in and out of a business. It’s reported in the cash flow statement, broken into three categories: 

• Cash from operations: cash from running the business, like customer payments and supplier costs.
• Cash from investing: cash from buying or selling long-term assets, like equipment or acquisitions.
• Cash from financing: cash from equity or debt activities, like issuing shares, borrowing, or repaying loans.

To compare cash flow vs net income, analysts focus on operating cash flow, which reflects whether a company’s daily operations generate enough cash to sustain the business.

Cash Flow vs Net Income: Key Differences

Net income and cash flow both measure performance, but they are calculated differently, appear in separate statements, and serve different purposes. 

Here’s a quick side-by-side comparison:

*Note: The cash balance becomes the starting point of the balance sheet.

Accrual Accounting vs Cash Movement

Net income follows accrual accounting — revenue is recorded when earned, not when cash is received. Likewise, expenses are recorded when incurred, not when paid. This means a company can report profits without having received payment or show a loss while still collecting cash.

Cash flow adjusts net income by removing non-cash items and factoring in changes in various accounts on the balance sheet (e.g., working capital). It shows how much actual cash was generated or used during the period.

Non-Cash Expenses and Timing

Some expenses, like depreciation or stock-based compensation, reduce net income but don’t involve cash leaving the business. When calculating operating cash flow, companies add these back to net income to reflect actual cash generated.

Timing differences also matter. If a company sells on credit, revenue is recorded immediately, even if cash arrives weeks later. That sale boosts net income — but doesn’t appear in cash flow until collected.

A Note on Working Capital

Cash flow also adjusts for changes in working capital — like accounts receivable, accounts payable, and inventory. These shifts explain many of the differences between net income and cash flow and are part of the reconciliation process between net income and cash flow.

How Net Income and Cash Flow are Connected

Net income and cash flow aren’t just two separate metrics. They’re directly linked through the operating section of the cash flow statement.

Most companies use the indirect accounting method to calculate operating cash flow. This approach starts with net income and then adjusts it for items that impacted profit but didn’t involve actual cash, along with changes in working capital.

Example of the Operating Cash Flow Calculation

A company reports $100,000 in net income. During the same period, it records:

1. $15,000 in depreciation
2. A $10,000 increase in accounts receivable
3. A $5,000 increase in accounts payable

Here’s how to calculate operating cash flow:

The company generated more cash ($110K) than it reported in net income ($100K). This reconciliation helps analysts evaluate earnings quality. If net income is consistently higher than operating cash flow, that can be a red flag.

Should I Use Net Income or Cash Flow? 

Use both net income and cash flow to gain comprehensive insights into a company’s health.

Net income measures profitability and operational efficiency. It shows:

• How well a company turns revenue into profit.
• Trends in earnings that impact valuation.
• Performance compared to industry peers.
• The results of cost-saving efforts.

Operating cash flow reflects liquidity and sustainability. It answers the following questions about the company’s ability to turn profit into actual cash:

• Are operations generating enough cash to fund the business?
• Can the company meet its financial obligations without borrowing?
• Are sales being converted into cash?

What if a company shows profit but lacks cash? This gap may signal deeper issues, such as delayed customer payments, inventory problems, or aggressive revenue recognition.

Financial analysts integrate both metrics across various analytical frameworks:

• Ratio analysis (profitability and liquidity)
• Valuation models, especially discounted cash flow (DCF)
• FP&A (financial planning and analysis)
• Credit and investment risk assessments

Companies with strong results in profits and cash flows generally demonstrate the most sustainable financial health and long-term growth potential.

Cash Flow vs Net Income: Final Takeaways and Next Steps

Net income and cash flow act as two lenses on financial performance. In financial analysis, the real value comes from understanding how these metrics interact. Together, they reveal how much profit a company reports and how much cash it actually collects and spends.

When both are strong, it’s a sign of a well-managed business. When they diverge, it’s a prompt to dig deeper.

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Additional Resources

Income Statement

Statement of Cash Flows

Essential Guide to Accounting for Financial Analysts

See all Accounting resources