Guide
Cash is not EBITDA
EBITDA (earnings before interest, tax, depreciation and amortisation) is a useful measure of operating performance. It strips out financing and accounting choices so businesses can be compared. It isn't money in the bank. Many board surprises, covenant breaches and failed deals happen in the gap between the two.
What sits between EBITDA and cash
Working capital. Customers pay late, inventory is built ahead of a season, or suppliers demand faster payment. EBITDA doesn't move, but cash does.
Capex. EBITDA excludes capital expenditure. Maintenance capex, the spending needed just to stand still, is a real and recurring cash cost.
Interest and tax. Both are cash out. In a leveraged business, interest can take most of the operating cash flow.
Adjustments. "Adjusted EBITDA" often removes costs that recur: restructuring, "one-off" consulting, share-based pay. The cash still leaves.
A simple bridge (fictional)
EBITDA $20.0m
less: increase in receivables ($3.5m)
less: inventory build ($2.0m)
plus: increase in payables $1.0m
less: maintenance capex ($4.0m)
less: cash tax ($2.5m)
less: cash interest ($5.0m)
= Free cash flow to equity $4.0m
$20m of EBITDA became $4m of cash. Neither figure is wrong, but they answer different questions.
Why it matters for boards and deals
Debt is serviced from cash, yet covenants are often set on EBITDA. A company can pass its leverage test (debt / EBITDA) and still run out of liquidity, especially when working capital is seasonal and the trough falls between test dates. Buyers know this, so in a sale process the conversation moves quickly from EBITDA to cash conversion.
How to present both
- Report EBITDA and operating cash flow on separate lines, every period.
- Reconcile adjusted EBITDA to reported on the same page.
- Show cash conversion (operating cash flow ÷ EBITDA) as a KPI with its trend.
- When a conclusion rests on one of the two, say which.
How CFO Sentinel handles it
On the desk, reasoning from the file is marked as reasoning, and cash and EBITDA are kept on separate lines. Ask "cash or EBITDA?" about a specific claim in your board paper or CIM. The answer comes from the file, and anything the file doesn't contain, such as a monthly working-capital schedule, is named as a gap rather than estimated.
Questions to ask of any EBITDA figure
- Reported or adjusted? If adjusted, where's the reconciliation?
- What was operating cash flow over the same period?
- What happened to receivables, inventory and payables?
- How much capex was maintenance?
- What does the covenant definition of EBITDA include?
If a paper can't answer these, it's presenting EBITDA as if it were cash.
Questions
Is EBITDA the same as cash flow?
No. EBITDA ignores working capital movements, capex, interest and tax, all of which affect cash.
Why do lenders use EBITDA if it isn't cash?
It's a standard, comparable proxy for debt capacity. Lenders also test liquidity and cash cover for this reason.
What is good cash conversion?
It varies by industry. The trend and the explanation matter more than a single benchmark.