Ryan VaughnCOO of Incite Tax & Accounting. Ask me anything about your taxes.

Cash Flow vs Net Income | Incite Tax

6 May 2025 · 1 min

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1:09

The presenter explains why cash flow and net income are not the same by using a business car purchase financed with a $60,000 loan. The loan proceeds are a cash inflow, and the monthly $600 payment is a cash outflow. However, only the interest portion of that payment reduces net income; the principal repayment does not affect net income. The video emphasizes that loan principal repayments lower cash but leave net income unchanged, illustrating how cash flow can diverge from net income and why analysts must adjust for these differences when evaluating a company's financial health.

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We talk about cash flow and not everything in net income is included in cash flow. I want to explain the differences between the 2 numbers. So let's say I purchase a car with a loan. I go to the bank, they give me a $60,000 loan for a car. That $60,000 goes to the dealership. I now buy a car. In the sake of this example, I'm using the car for business, so it's a business asset. And now I'm making monthly payments on this $60,000. Well, that's cash, right? I got the $60,000 upfront, and now the bank requires me to pay it back with interest. So let's just say my payment is $600 a month. Cash outflow, $600. My net income is not going to reflect that $600 payment. It's only going to reflect the interest portion of that payment. Me paying back the the principal amount of the loan doesn't decrease my net income. So anytime we have loan payments, for whatever reason, that's cash outflow, but my net income number actually stays higher because the principal amount is not a reduction of net income.