Free cash flow (FCF) vs. net income: Differences and how to calculate

According to our entrepreneurship survey, 44% of business owners stated that growing a business they already own was their plan to build personal wealth in 2025. 

To manage a business and grow personal wealth, these business owners must understand the difference between free cash flow vs. net income. Free cash flow and net income are essential elements of a healthy, growing business, but they are not the same. 

One refers to profitability, whereas the other simply shows how available cash moves. Whereas a business’s net income is listed on an income statement, the FCF can be calculated using the company's income statement and balance sheet. 

Both, however, are instrumental in providing a comprehensive view of a company's financial health and sustainability. 

Jump to:

• Free cash flow vs. net income basics
• Key differences between free cash flow and net income
• Practical applications of free cash flow and net income
• Limitations of each metric
• Best practices for analyzing FCF and net income
• Next steps for managing cash flow
• Free cash flow vs. net income FAQ

Free cash flow vs. net income basics 

To fully operate your business and truly find it financially successful, you must know the difference between different financial reporting metrics like free cash flow and net income. While both are undoubtedly useful information, each tells a different picture of your business health. 

What is net income? 

Net income is measured by revenue minus expenses. Net income is the bottom line on a business’s income statement, reflecting how much money the company made after deducting all expenses. These include the cost of goods sold, operating expenses, income expenses, and taxes. 

Net income is most helpful when evaluating financial performance, attracting investors, and securing loans. To calculate net income, you’ll need some key information:

Net Income = Total revenue - total expenses

Where total revenue includes:

• Sales of products or services
• Interest
• Dividends
• Rent
• Lawsuit proceeds
• Donations

And total expenses include: 

• Wages
• Supplies
• Rent
• Utilities
• Overheads
• Any other operational costs 

When calculating net income, a higher total represents a more profitable company (businesses should always strive for a positive net income total). Analysts use this total to compare businesses across the same industry to gauge financial health—the higher a company's net income, the stronger its financial position.

What is free cash flow (FCF)? 

Free cash flow (FCF) (sometimes referred to as net cash flow) is the money a business has after paying capital expenditures (capex) and operating expenses. This measurement only focuses on actual cash generated and considers the necessary investments to maintain operations, which differs slightly from net income. 

Cash flow refers to the business’s inflows and outflows of cash. Positive cash flow occurs when more money comes in at any given time, while negative cash flow means more money is out.

Free cash flow is helpful when determining dividend payouts and share buybacks, assessing debt repayment ability, and making investment decisions. The free cash flow formula is pretty simple: 

You can think of FCF as your budgeting. If you have a high FCF, you’ve paid your bills and have extra money left over, which is the goal. If the number is small, you have little extra money left. And if that number is negative, you’ve spent more than you’ve brought in, which does not look good to investors. 

Key differences between free cash flow and net income 

It’s not only the scope of what is being looked at when understanding free cash flow vs profit. It’s also important to look beyond the scope and see how these two metrics fundamentally differ. 

• Noncash expenses: net income includes noncash expenses like depreciation within the calculation, whereas FCF does not. 
• Timing differences: Net income recognizes revenue when earned, regardless of when the cash flows. FCF recognizes the actual ins and outs of cash flow as it happens. 
• Working capital considerations: Working capital changes do not directly impact net income, whereas FCF is directly impacted. 

Reporting: Net income is listed at the bottom of the company’s income statement, whereas FCF is not directly reported on financial statements.

Practical applications of free cash flow and net income 

Even though FCF and net income are different, both are used in various ways to discern how successful a company is. Some ways that both of these metrics are used include:

FCF practical application

Free cash flow is most helpful when making investment decisions. Investors review FCF to measure a company’s valuation and the true value of an acquisition target. 

This equation is also helpful when considering debt repayment, as a company with a high FCF can quickly and easily pay off debt, thus improving its credit standing. 

Business owners also use the FCF formula to help determine dividend payments, where a higher FCF means that the company can pay dividends to shareholders.

Net income practical application

Net income is just as valuable for business owners, just in a different capacity. Net income can help determine performance evaluation, where investors can judge the company’s overall financial health and performance. 

Net income is also critical for financial reporting since this value is the income statement's bottom line. This metric is important for tax planning, as it helps determine the business’s tax liability. 

Limitations of each metric 

Even though FCF and net income are critical information for a business to determine financial health, each has some limitations. That’s why it's important to use the metrics together, versus one or the other, to come to any business conclusions. 

To harmoniously review your business’s financial standing, use QuickBooks Online to easily track your cash flow and help prepare your income statements. 

Best practices for analyzing FCF and net income 

Business owners know that using FCF and net income together to get a holistic business view is best. Using both metrics together, along with other key financial metrics like the accounts receivable (AR) ratio and accounts payable (AP) ratio, will help to provide not only you but also your investors with the most clear financial picture. 

• Analyze trends between these two metrics, focusing on consistent growth in net income and positive FCF generation. Then, the trend of FCF will be analyzed compared to net income. 
• Establish a strategic plan for continuous monitoring of FCF and net income and adjust analysis as needed.
• Conduct a competitor analysis with your key competitor to determine whether your business is more or less profitable and to compare differences between free cash flow and net income against industry averages.

Next steps for managing cash flow

Your business’s FCF and net income are some of the tools in your toolbox to help decipher its financial health. 

While this can seem overwhelming to track and analyze, Intuit Assist can help streamline accounting and reporting processes. Let the power of QuickBooks help you to fully digest key financial metrics so you can get back to growing your business. 

Disclaimer: Intuit Assist and certain other AI features and functionalities are currently available at no additional cost to certain QuickBooks users. Pricing, terms, conditions, special features, and service options are subject to change without notice. Intuit reserves the right to discontinue the feature at any time for any reason in its sole and absolute discretion.