Cash Flow vs. Earnings

CORE DEFINITION

Earnings versus cash flow is the distinction between accrual accounting, which recognizes revenue when performance obligations are met, and cash accounting, which records money when it actually changes hands. Charlie Munger and Warren Buffett consistently favor free cash flow, defined as operating cash flow minus maintenance capital expenditure, over reported net income, on the argument that cash is what keeps a business alive. The qualification is that cash flow is not automatically clean: capitalizing operating costs, stretching payables or selling receivables can flatter it, so the two measures must be read together rather than in isolation.