The ultimate goal of a business is to generate cash for its shareholders. Investors often consider net income the “bottom line” of a business, indicating how much profit it makes. Net income equals revenue minus expenses. However, some types of revenue and some types of expenses don’t result in the receipt or payment of cash. This includes things like depreciation, amortization, accruals, and deferrals.
When using cash flow as the indicator of business profitability, all these items get stripped out. This creates a clearer picture of how much money a company makes in a period that it can reinvest or return to shareholders. Free cash flow is a good metric to use.
