What’s the Difference between EBITDA and CASH FLOWS?
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EBITDA is a popular metric for many reasons, one of them being that it is commonly used as an approximation for cash flows
But in reality, this can paint a very false picture of your actual cash flows
Let’s start with some basic definitions…
➡️ What is EBITDA?
EBITDA’s literal definition is
It isn’t a GAAP metric, so you won’t find it on your P&L
➡️ What are cash flows?
Like the name suggests, this is the amount of cash entering / leaving your bank account
It’s commonly presented on a statement of cash flows under either the Direct Method, or Indirect Method
So how do they differ?
Well…EBITDA revolves around activity on your Profit and Loss
While cash flows revolves around both your Profit and Loss AND your Balance Sheet
Here are a few examples of how these 2 metrics can end up being wildly different:
🤔 What if 90% of your customers paid you net 30? Your EBITDA could look better than your cash flows
🤔 What if you acquired a huge piece of machinery (Fixed Asset)? Your EBITDA could look better than your cash flows
🤔 What if you charge your customers for 12 months upfront (common in ARR business models) Your Cash flows can look better than your EBITDA
🤔 What if you incurred a ton of expenses, but your vendors agreed to allow you to pay net 30? Your Cash flows can look better than your EBITDA
Those are just some examples of how the 2 can differ
Do I think EBITDA is a good measure for cash flows?
Well…it depends on the business
Here are some usecases where the 2 metrics can be similar:
💡 Businesses who don’t invest a heavy amount in Fixed assets
💡 Businesses who don’t have a large amount of debt / financing
💡 Businesses who don’t have large activity around receivables / payables
Those are my thoughts on how EBITDA differs from cash flows