A $60,000 car loan shows why cash flow and net income diverge. The loan itself is cash in, but only the interest on your $600 monthly payment counts as an expense. Principal repayment reduces cash but not profit.
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.
