Net Cash/Income

How does net cash flow differ from net income and why is that difference relevant to financial decision making?

Net cash flow takes in consideration the changes in short-term assets of an organization. Whenever a cash receipt is made then net cash flow is raised or when a bill or expense is paid then the net cash flow decreases. It is basically a measure of how much cash, or cash equivalents, that the organization has at any given time. Net cash flow can also be forecasted so that the organization can have an idea of how much cash it will hold, or need to hold, in the future.

Net cash flow, although it is indirectly related, is not necessarily directly related to any measure of profitability. For example, if a company receives a check for a hundred thousand dollars then it would increase net cash flow; even if the receipt was for a project in which they were losing money on. Therefore you can have a positive net cash flow but still have a negative net income. However, cash flow is an important consideration because it often represents a company's ability to pay their short-term liabilities.

By contrast, net income is a direct measure of profitability. This approach will compile the company's total revenues and total expenses for any given period and determine how much of the company's financial activities created profit for stakeholders. The ultimate goal of a company is to maximize profit, not cash flow, in order provide the investors a return.

Cash flow is also an extremely important consideration though. If a company does not have enough cash to pay its bills then it could get itself into a lot of trouble; possibly insolvency. A company can have a large net income, but depending on how the revenues are collected, they could have a negative cash flow at the same time. Many companies have gone bankrupt, not because they are not making a profit, but because they didn't properly manage their cash flow to ensure they had enough cash reserves to pay their bills.