Whether you’ve taken accounting or not, you’re probably already familiar with the concepts of revenue and “profit.” Income is how much you earn and it goes directly into your pocket, either from a salary, from a business, or both. On the other hand, in a nutshell, profit is more specific in the sense of how much you earn from a business…it’s your sales minus your costs and expenses. This is why earnings are sometimes called “net” income.

However, you should be careful when using the term profit or net income. It means you win, but it doesn’t necessarily mean you win real money. Why? Let’s say you sell a watch to someone. He picks up the watch from your store and promises to pay you $100 in cash after 1 month. Do you record in your books that the sale occurred today or a month later? Surprise surprise! Based on generally accepted accounting principles (GAAP), you should record that the sale was made today. Not next month. So you can also post your earnings today… even if you haven’t earned real cash yet. This type of benefit is called “earned” income. You earn income even without collecting cash yet.

This is where the difference between a Statement of Net Income and a Statement of Free Cash Flow comes in. A Statement of Net Income shows net income, based on cash receipts and revenue growth, as well as cash expenses and expense growth. A free cash flow statement shows free cash flow based on all actual cash the business earns, minus all cash payments the business actually makes. A free cash flow statement does not take into account accrued income and does not take into account accrued expenses that have not yet been paid in cash.

Also, a Statement of Net Income does not reflect cash payments for capital (such as the business’s building, property, and equipment), but the Statement of Free Cash Flow does reflect these payments as long as these payments have (already) been made. made in cash.

It can be said that the Statement of Net Income and the Statement of Free Cash Flow represent 2 different philosophies. So who follows what philosophy? Basically, accountants prefer to use the income statement to report the company’s earnings. The government also usually looks at your income statement when it wants to figure out how much tax you have to pay. On the other hand, modern financial managers generally prefer to view the free cash flow statement as a true measure of “how well the business is doing,” believing that income isn’t really income unless you actually earn cash.