Operating Cash Flow vs. Net Operating Income: An Overview

Net operating income and operating cash flow are different metrics used in measuring the financial viability of an investment or a company.

Key Takeaways

  • Net operating income is a measure of profitability in real estate—the amount of cash flow a property generates after expenses. 
  • Operating cash flow is the money a business generates from its core operations. 
  • Net operating income is generally the same as operating income for a company.
  • Operating income is often referred to as earnings before interest and taxes (EBIT), although the two may differ at times. 

Net Operating Income

Net operating income (NOI) is a profitability metric typically used in real estate to measure a property’s profit potential. Net operating income measures the amount of cash flow that a property generates after all expenses have been deducted or have been paid.

Investors use NOI to determine whether a property is a good investment, while creditors use NOI to determine whether the property is a good credit risk. Net operating income includes rental income, as well as any other sources of income including parking and service fees, such as vending, and laundry machines.

When calculating operating expenses (NOI) are deducted from the property's total income. Those expenses can include the costs of running and maintaining the building and the grounds, such as insurance, property management fees, legal fees, utilities, property taxes, repairs, and janitorial fees.

Operating Cash Flow

Operating cash flow measures the cash that a company generates from its daily core business or operations. Operating cash flow is also known as cash flow from operations and is reported on the corporate cash flow statement

Operating cash flow is calculated by subtracting operating expenses from total revenue. In short, it measures how much cash flow is generated from a company's main business by excluding any other sources of income, such as capital gains from investments. Cash flow from operations is important because it shows how successful a company’s primary business is performing.

Investing and financing transactions, such as borrowing, buying capital equipment and making dividend payments, are excluded from operating cash flows and are reported separately.

Special Considerations

The net operating income calculation can also be referred to simply as operating income when it comes to determining the financial health of a company.

Operating income is a company's profit after operating expenses are deducted from total revenue. Operating income shows the amount of profit a company generates from its operations without interest or tax expenses. Operating income is calculated by taking gross income and subtracting operating expenses, which include selling, general and administrative expenses (SG&A), depreciation and amortization. 

Since operating income excludes taxes and interest expenses, it is often referred to as earnings before interest and taxes (EBIT). However, there are times when operating income can differ from EBIT.