EBITDA vs. Cash

 

EBITDA doesn’t pay your bills.

Cash flow does.

And where does cash flow come from?

Operations.

There are 3 main cash flow drivers you need to understand:

✓ Revenue Growth

✓ Operating Profits

✓ Working Capital Efficiency

Let’s break it down:

1. Revenue Growth

Revenue growth is the starting point for cash flow.

But here’s the catch:

It’s not just about selling more—it’s about selling smart.

What drives it:

✓ Sales volume: Increase the number of units sold.

✓ Pricing strategy: Optimize prices for maximum value.

✓ Revenue growth feeds your cash flow engine, but that’s just the first step.

2. Operating Profits

Margins are essential.

Revenue means nothing if you can’t convert it into profits.

What drives operating profit:

✓ Lower COGS: Renegotiate with suppliers or automate.

✓ Reduced SG&A: Eliminate waste in marketing, payroll, and overhead.

✓ Healthy margins = healthy cash flow.

3. Working Capital Efficiency

This is where businesses lose or win.

Why it matters:

Efficient working capital means you’re not tying up cash unnecessarily.

What drives it:

✓ Inventory turnover: Move products faster by stocking what sells best (lower DIO).

✓ Receivables: Collect payments faster from your customers (improve DSO).

✓ Payables: Manage payments strategically with your suppliers (extend DPO).

An efficient cash conversion cycle keeps cash flowing where it’s needed most.

The Reality:

EBITDA might make your quarterly reports shine,

But it’s useless for paying bills, funding growth, or repaying debt.

If you want to build a thriving business,

Focus on what really matters:

Cash flow from operations.

You can't take EBITDA home.

Let’s get real:

You can’t pay taxes with EBITDA.

You can’t pay dividends with EBITDA.

You can’t service debt obligations with EBITDA.

You can’t buy inventory, equipment, or fund growth with EBITDA.

Why?

Because EBITDA is not cash.

Here’s the problem with relying on EBITDA:

↳ Cash tied up in unsold inventory or uncollected receivables isn’t available to pay suppliers or taxes.

↳ Maintenance CAPEX (required to sustain output) eats into cash that could’ve been used to repay debt or invest in new assets.

↳ Tax payments deplete cash that could’ve gone into expanding sales, R&D, or marketing.

So, what can you actually do with EBITDA?

↳ Use it for trend analysis and tracking company performance over time.

↳ Use it to calculate debt service ratios (if your lender requires it).

↳ Use it to compare companies—cautiously—while accounting for differences in CAPEX and working capital requirements.

But here’s what you shouldn’t do:

🚫 Don’t use EBITDA for performance management without accounting for CAPEX required to sustain output.

🚫 Don’t assume EBITDA shows your ability to service debt without adjusting for cash taxes, dividends, CAPEX, and working capital.

🚫 Don’t use EBITDA for valuation without a DCF analysis and a Quality of Earnings report that adjusts for management’s accounting policies and working capital needs.

Remember:

EBITDA may be a helpful tool, but it’s not a financial strategy.

If you’re basing critical decisions on EBITDA alone, you’re missing the bigger picture—and that could jeopardize your company’s future.

Cash Flow is King and Queen alike. 

EBITDA is just one piece of the puzzle.