Fact Checked

What Is Income Flow?

John Lister
John Lister

Income flow is the overall pattern of the revenue and expenses from transactions that a company records. It is a contrast to cash flow, which tracks when those payments are actually made. The two have important practical differences which is why both are listed in financial accounts. The term income flow is also sometimes used in reference to a money making strategy sometimes linked to scams, and to a simple theory of economics.

The existence of income flow as a distinct concept comes about because of the existence of credit. Often in business a transaction takes place but payment is not immediate. For example, a business may supply goods to a customer along with an invoice, then get paid later, or a business may be able to buy raw materials on credit. It's also possible for the payment to come in advance of receiving the good or service, for example a magazine that sells subscriptions, or a business paying rent on its offices in advance.

Man climbing a rope
Man climbing a rope

Most businesses, particularly larger ones and those which have publicly traded shares, use an accounting process known as the accrual method. This means recording transactions in accounts as soon as the deal is made and the obligation to pay arises. The income flow is the measurement of these transactions and the way that they create an "on paper" net revenue or loss for the company.

The income flow is reported on an income statement, also known as the profit and loss account. Most sets of accounts also include a cash flow statement that records the actual payments made and received. This can be particularly important to shareholders and investors as a company that has a healthy income flow may struggle if it has unfavorable credit terms or unreliable customers that lead to a cash flow shortage.

The term may also be used in phrases such as passive income flow or rapid income flow. These generally refer to set-ups where somebody does some initial work then continues receiving money with little or no ongoing work. There are plenty of legitimate examples of this in action such as an author receiving royalties or a website owner receiving advertising revenue. The term can also be used for scams where the person pays up front for a guarantee or expectation of future income that doesn't pan out.

Another variant of the phrase is the circular flow of income. This is a very simple model of an economy based on the relationship between businesses and consumers. The model shows that consumers buy products, businesses make the products, businesses pay staff to make the products, and those staff are consumers who use the wages to buy products. The model is the basis of theories that economies can rapidly expand or contract because the relationship exaggerates booms and busts. More complex versions of the model take into account the role of government taxation and spending, as well as exports and imports.

You might also Like

Discuss this Article

Post your comments
Forgot password?
    • Man climbing a rope
      Man climbing a rope