Whenever professionals discuss the financial performance of early education companies, the conversation will always include “cash flow”…and that can be dangerous. The term “cash flow” can mean many different things and it can be the cause of material misunderstandings that can lead to litigation or you losing some of your money…or both.
Instead of using the term cash flow in your discussions, use the term EBITDA. EBITDA means…
Earnings
Before
Interest
Taxes
Depreciation and
Amortization (of non-tangible assets—not loan amortization)
It is commonplace for Earnings to include compensation paid to the company’s owners including salary and benefits like the owner’s health insurance, company car…etc.
EBITDA is a much better indicator of a company’s true cash flow and its ability to meet its obligations as it includes the non-cash tax deductions of Depreciation and Amortization. EBITDA shows you how much money you have not how much you have on paper.
ALWAYS: If you’re in a conversation with someone who uses the term “cash flow”, ask them if they are defining cash flow as EBITDA…or simply ask them how they are defining cash flow. Many sales people like to use the term cash flow. It’s vague. It allows for a lot of latitude. People depend on you. It’s always best to be very clear when you’re talking about your money.
As always, we hope it helps.
Brad Barnett, President BFS®
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