Introduction: This article described the “Net Profit vs. Net Cash Flow” in business Financial Reports. Also this article help business owners to clear understand about the net profit and cash flow. So, how does bottom-line profit differ from cash flow, exactly? Or, more specifically, how do individual transactions affect your company’s reported profits and cash flow differently?
Net income is a great measure of the financial success of your core operations. It shows the extent to which your pricing and volume of activity compare to the expenses you incur to provide your product or service. Significantly, a company does not have to collect from its client in order to have revenues The majorities of organizations business owners are not know enough about the company’s actual accounts positions, like net Income and/or Cash Flow, financial statements are full of a affluence of in sequence and each statement tells its own story of what is occurrence in an business. Below I have described character of the Net Income/profit Cash Flow that would be helpful for readers to clearly understand about the Net Income/profit Cash Flow
What is Cash Flow?
In accounting conditions, Cash Flow is the amount of money that a business receives and spends through an exacting period of time. It’s not sales made on credit. Its money you have collected and can really expend. At a glance the cash flow statement can afford insight on a company’s financial position and its ability to remain solvent in the short term.
What is Net Income?
To locate it simply, Net Income (also called bottom line / earnings) refers to the profit or the loss that residue with a business or an entrepreneur after all the cost and expenses are subtracted from the total income.
Difference between net cash flow and net income
Generally accepted accounting principles (GAAP) and on the accrual method of accounting, net income is calculated as follows:
01. Revenues earned (-) the Expenses incurred in order to earn those revenues. If a company earns revenues in December 2010 but permits individuals customers to pay in 30 days, the cash from the December revenues will expected is received in January 2011. In this condition the December 2008 revenues will raise the December 2010 net income, but will not raise the company’s December 2010 net cash flow.
02. The cause why there is a clash between net income and cash flow is that the income statement is efficient with any sales completed or revenues earned as soon as the transaction is done. However, payments for such sales may be truly received much later. Therefore, still the net income shows profits and the capitalist in reality has ready money, it is not yet available as cash flow and cannot be spent.
03. Cash flow designates the level of a company’s capacity to meet its financial commitments. Positive cash flow enables a company to meet payroll, pay suppliers, meet debt payments and make distributions to proprietors. Cash can be generated by procedures, or afford by lenders or owners.
For example, “Positive cash flow of $500,000 for 2010″ means cash balances at the end of the year were $500,000 higher than cash balances at the start of the year. “Net income of $500,000 for 2010″ means revenues (sales) exceeded expenses by $500,000 for the year. Accepting the difference between the two and their relevant importance is a big step towards shrewd financial management
04. There is no common regulation that says Net Income is always higher than Cash Flows or vice versa. It is a superior idea to ask company’s bookkeeper to prepare together the Income Statement and Statement of Cash Flows each month so that owners can trail the trends of his operations and how those items impact how much cash have in the bank.
Conclusion: The two main methods of recording accounting dealings are cash basis accounting and accrual basis accounting. Each method has both advantages and disadvantages. But, only one method is approved by generally accepted accounting principles (GAAP)
If company’s use the cash basis method of accounting frequently the only difference between companies Net Income and Cash Flow will be the non-cash items. but, if company’s use the accrual method of accounting the difference between Net Income and Cash Flow will be a little more complicated to calculate because company have to take into deliberation the changes in Accounts Receivable, Inventory, Accounts Payable and many other accounts
