Most businesses use either accrual basis accounting or a modification of accrual basis accounting. Accrual basis accounting records almost all transactions at the times of their occurrence rather than when cash is either received or paid out. So long as the transactions are complete and the numerical values of the sums in question are known or estimable, they can be recorded under accrual basis accounting. This is one cause of divergence between earnings and cash flow.
Income and Cash Flow
Net income in each time period is equal to revenues minus expenses. It is the change in the business’s financial holdings incurred through the business running its operations. In contrast and comparison, cash flows are changes in a business’s cash and cash equivalents. Cash flows can result not only from the business’s operations, but also from its activities related to its long-term assets, its debtors, and its creditors.
Net Cash Flow
Cash flow in a comparison against earnings figures is likely to be either net cash flow or more specifically net cash flow from operating activities. Net cash flow is the total resultant change in the business’s cash and cash equivalents due to its activities for the period in question. It is not the same as net income because it includes non-income-related transactions but does not include non-cash-based revenues and expenses.
Earnings Before Interest, Taxes, Depreciation and Amortization
Earnings before interest, taxes, depreciation, and amortization is equal to net income minus those specific expenses. It is a figure that some businesses use to make their net incomes seem better than they actually are, using the claim that such expenses do not reflect their actual performance in running their operations. EBITDA is most comparable to net cash flow from operating activities, those being the total resultant change due to the business’s operations.
Comparison of Net Cash Flow and EBITDA
A higher net cash flow than EBITDA means that the business’s cash and cash equivalents are increasing by more than what it is earning even with those expenses deducted. In comparison, a higher net cash flow from operating activities than EBITDA means that the business’s cash and cash equivalents from its operations are increasing by more than what it is earning despite those deductions. Lower net cash flows than EBITDA mean the reverse of those scenarios. What this means depends on the accounts and transactions that went into the calculation of those figures. For example, it could be that the business’s net cash flow from operations is lower than EBITDA because most of its sales were made on credit, but it is also possible that the business acquired large amounts of inventory using cash that was included in the cash flow calculation but not income calculation.