On the surface it would seem that the amount your company earns -- its net income -- should be the amount it has available to spend, or its net operating cash flow. However, the nature of capitalizing and operating a small business creates situations where you sometimes earn money that goes directly to pay for past debts, and you sometimes have borrowed money available to spend even though you did not earn it.
Net income is the amount that your company earns, or its net profit. Businesses calculate net profit by subtracting the value of business expenses that are deemed legitimate for tax purposes from gross sales receipts, or gross income. In other words, net income is the amount that a business has left over after calculating how much it spent in order to operate. Allowable business expenses include rent of business property, supplies and materials, payroll, business tax and licenses, and interest on business debt.
Operating Cash Flow
Cash flow is a term that refers to the amount of money that a business has on hand to cover day-to-day operating expenses. Businesses earn money by selling goods and services, but they also finance business activities through infusions of capital from owners and other stakeholders, and also from loans. Net operating cash flow is the amount that a company has left over after subtracting its ongoing expenses from the amount it has available to meet these expenses.
Various situations can cause discrepancies between a company's net income and its net operating cash flow. Although interest on business loans is usually paid as it accrues, the principal of a business loan can go to pay for expenses that drive down its net income, at least in the short term. Conversely, when the business pays back a loan's principal, it does so using earnings or net income that are not available as cash flow because they are going toward loan payments.
If your business is earning a profit but your net operating cash flow is insufficient, you will likely be experiencing stress but your company is probably on the right track, and it is most likely just a matter of time before you catch up and improve your cash flow. If your company is not earning a profit but your net operating cash flow is still sufficient to cover your daily operations, it is just a matter of time before you run into trouble because you are spending money that you have not earned. Eventually you will have to pay off your debts.