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Net Operating Income v. Operating Cash Flow

by  | Corporate
Posted:     Updated: Oct 19, 2017  1:08 ET
 
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Net operating income is necessary to attract potential investors or creditors and to distribute dividends periodically to owners. However, regarding organization finances, net income does not tell a comprehensive story. If there is a high one-time revenue from asset sales, net operating income is much higher than operating income. Similarly, one may recognize significant depreciation expenses and other one-time expenses that lead to a low or negative net income, even though the business is performing well. Still, what is the importance of identifying organizational operating cash flow?

Operating cash flow is ascribed with total organizational cash flow. During moments of capital infusion, operating cash flow compares money resources spent. From regular operating activities, operating cash flow identifies cash in-flows and outflows. When there is recognition of depreciation over time, organizations are less inclined to spend resources. Moreover, depreciation expenses reduce net income; yet, does not impact operating cash flow. This subtle variation is not indicative of an organization’s net operating income.

Net Operating Income or NOI is equal to a property's yearly gross income less operating expenses. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, etc. All income associated with a property. Operating expenses are costs incurred during the operation and maintenance of a property. They include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc. The following are not operating expenses: principal and interest, capital expenditures, depreciation, income taxes, and amortization of loan points. Net operating income is calculated like this.

Income

Gross Rents Possible 100,000; Other Income 3,000; Potential Gross Income 103,000; Less vacancy Amount 2,000; Effective Gross Income 101,000; Less Operating Expenses 31,000; Net Operating Income = 70,000

Net operating income or NOI is used in two very important real estate ratios. It is an essential ingredient in the Capitalization Rate (Cap Rate) calculation that is used to estimate the value of income producing properties. Let us assume we have a market capitalization rate of 10 for the type of property we are considering purchasing. A market cap rate is calculated by evaluating the financial data from current sales of similar income producing properties in each market place. We are evaluating a similar income property that is currently for sale with a net operating income of $50,000. We would estimate the value of this property like this:

Net Operating Income 50,000; Estimated Value = 500,000; Capitalization Rate .10

Bottom-line, for an organizational enterprise, net operating income is the end game. After accounting for revenue and recognized business expense, net operating income reflects remaining money resource(s). For whatever the reason, operating cash flow remains a preferred metric of organizational financial health.

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Topics: Commercial hard money | Commercial lending
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Net Operating Income v. Operating Cash Flow

by LUCEV Finance & Investment Group | Corporate
Posted: Aug 11, 2017  16:40 ET    Updated: Oct 19, 2017  1:08 ET

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