Tag Archives | cash flow

Adjusted EBITDA

See Also:
EBITDA Valuation
Calculate EBITDA
Valuation Methods
EBITDA Definition
Multiple of Earnings

Adjusted EBITDA

Adjusted EBITDA is a valuable tool used to analyze businesses for the purposes of valuation and potential acquisition. It is also called Normalized EBITDA as it systematizes cash flow and deducts irregularities and deviations. Adjusted EBITDA is an additive measure used to determine how much cash a company may produce annually and is typically used by security analysts and investors when evaluating a business’s overall income; however, it is important to note business valuation using Adjusted EBITDA is not a Generally Accepted Accounting Principles standard and should not be used out of context as various companies may categorize income and expense divisions differently.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization and is a meaningful measure of operating performance as it allows businesses and investors to more fully evaluate productivity, efficiency, and return on capital, without factoring in the impact of interest rates, asset base, tax expenses, and other operating costs.

Adjusted EBITDA is a useful way to compare companies across and within an industry. Many consider it a more accurate reflection of the company’s worth as it adjusts for and negates one-time costs such as lawsuits, start-up or development expenses, or professional fees that are not recurring, just to name a few. More importantly, adjusting EBITDA often reflects in a higher sale’s price for the owner.

Adjusted EBITDA Margin Calculation

Adjusting EBITDA measures the operating cash flow using information acquired from income statements. It can be measured annually but is most beneficial when averaged over a three to five year period in order to account and adjust for any anomalies. Generally speaking, a higher normalized EBITDA margin is preferred, and the larger a company’s gross revenue, the more valuable this new measurement will be in a future acquistition.

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Typically, analysts will then normalize or adjust the standard EBITDA by considering other expenses outside the operating budget. Adjusted EBITDA is found by calculating the Net Income, minus Total Other Income (Expense), plus Income Taxes, Depreciation and Amortization, and non-cash charges for stock compensation.

At this point, you are probably curious how to calculate Adjusted EBITDA. The following is a simplified example of how you might begin calculating this formula for your business. Start with EBITDA; then add back value to your company by considering areas of excess and factoring in one-time costs.

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Differences between EBITDA versus Adjusted EBITDA

There are a few key differences between EBITDA and Adjusted EBITDA. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, idenitifies a company’s financial profits by calculating the Revenue minus Expenses (excluding interest, tax, depreciation and amortization). It compares profitability while excluding the impact of many financial and accounting decisions. The EBITDA margin is an assessment of a company’s operating profitability as a percentage of its total revenue. Calculating the EBITDA margin allows analysts and investors to compare companies of different sizes in different industries because it formulates operating profit as a percentage of revenue.

Adjusted EBITDA, on the other hand, indicates “top line” earnings before deducting interest, tax, depreciation and amortization. It normalizes income, standardizes cash flow, and eliminates abnormalities often making it easier to compare multiple businesses. Redundant assets, owner’s salaries or bonuses, and a facility rental above or below fair market value are all examples of adjustments that would need to be accounted for when evaluating the value of a company for a buyer.

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What Business Issues Keep You Up?

As a business owner, I often find myself lying awake at night worrying about issues my company is facing.  Are we making as much money as we should be?  How is my cash flow?  Do I have the right team to grow the business?  These are just a few of the questions that cause me to lose sleep.

My guess is that I’m not alone in my insomnia, and I was curious to know what issues are keeping others up at night.  I put together a brief survey of some common business issues and solicited responses from my clients, colleagues, referral partners and members of our LinkedIn group.  I asked them to rate these issues on a scale of 0 (sleeping like a baby) to 5 (Ambien please!).  Here are the results so far:


up at night survey graph


Based upon these results, it appears that cash flow issues are currently demanding most of your attention.  Not surprisingly, managing growth comes in a close second as rapid growth is often the chief cause of cash flow problems.  I’m curious to see if turnover will become more of an issue as the economy continues to stabilize and employees begin to seek new opportunities.

What financial issues do you think are the most pressing for your company?  We’d love to have your input, so click here if you haven’t had a chance to submit your answers yet.  Stay tuned for updated results…



Cash Flow vs Net Income

See Also:

Operating Income (EBIT)

Free Cash Flow Analysis


Cash Flow vs Net Income

What is Cash Flow?

Cash flow is the blood of a business. It is the measure of what cash is coming in and what is leaving. Cash flow is a more accurate measure of whether a company has enough capital to sustain itself. For example, a company can be extremely profitable and still go out of business due to poor cash flow.

In planning a new business, cash flow is still a very important concept to focus on. Different services and habits affect cash flow. For example, a company’s payment terms greatly affect the amount of cash flowing in and out of a business. If it gives terms that are long, the business could have trouble meeting its other financial obligations. If the terms are short, it can give the business terrific cash flow.

The difference in length of terms comes down to the sizes of accounts receivable and inventory. If a business’s accounts receivable is high relative to its revenue, it is a sign of cash flow problems. Furthermore, if a company has a large inventory account, it can also be a sign of poor cash flow. A large inventory could show a purchasing problem that siphons cash faster than it is needed. Either way, if a business has too much tied up in inventory, it causes cash flow problems. The balance sheet and income statement might show a profit, but cash flow shows whether a business can sustain itself.

Cash Flow Statements

Cash flow statements are broken down into three areas. The areas are operating activities, investing activities, and financing activities. The idea behind separating these sources of cash is to get a better idea of where the cash is coming from. A detailed cash flow statement shows what amount came from loans, products/services, and investments. This can be very useful to investors and lenders.

What is Net Income?

Net income is calculated by subtracting total expenses from revenue. This is the ‘profit’ that most people refer to. Within the total expenses to be subtracted from revenue, overhead and cost of goods/services are both included. This means that net income is the measure of whether a company actually made money during a period. Due to accrual accounting, net profit does not automatically mean a business has cash. However, net income is efficient at tracking business done within a period. This makes net income a better estimate of profitability than cash flow.


Operating Cycle Definition

See Also:
Operating Cycle Analysis

Operating Cycle Definition

The Operating cycle definition, also known as cash operating cycle or cash conversion cycle or asset conversion cycle, establishes how many days it takes for a company to turn purchases of inventory into cash receipts from its eventual sale. Operating cycle has three components of payable turnover days, Inventory Turnover days and Accounts Receivable Turnover days. These come together to form the complete measurement of operating cycle days. The operating cycle formula and operating cycle analysis stems logically from these. To be more specific, the payable turnover days are the period of time in which a company keeps track of how quickly they can pay off their financial obligations to suppliers. The next step, inventory turnover, is the ratio that indicates how many times a company sells and replaces their inventory over time. Usually, this ratio is calculated by taking the overall sales and dividing it by the overall inventory. However, the ratio can also be calculated by taking the cost of goods sold and dividing it by the average inventory. The final step, the accounts receivable turnover days, encase the period of time in which the company is evaluated on how fast they can receive payments for their sales. As said before, when all of these steps are put together the operating cycle is complete

Operating Cycle Applications

The operating cycle concept indicates a company’s true liquidity. By tracking the historical record of the operating cycle of a company and comparing it to its peer groups in the same industry, it gives investors investment quality of a company. A short company operating cycle is preferable since a company realizes its profits quickly and allows a company to quickly acquire cash that can be used for reinvestment. A long business operating cycle means it takes longer time for a company to turn purchases into cash through sales. In general, the shorter the cycle, the better a company is since less time capital is tied up in the business process. In other words, it is in a business’ best interest to shorten the business cycle over time. The easiest way to do this is to try to shorten each of the three cycle sections by, at least, a small amount. The aggregate change that comes from the shortening of these sections can create a significant change in the overall business cycle which can consequently lead to a more successful business.


How to Develop Daily Cash Report

See Also:

Cash Flow Statement
Track Money In and Out of a Company
Cash Flow Projections
Cash is in Your Business
Thirteen Week Cash Flow Report

The Daily Cash Report

The Daily Cash Report is used to report on the daily cash balance and to help manage cash on a weekly basis. When entering a situation where active cash management is required for your daily cash flow, this tool is especially helpful. Use the daily cash report template as a tactical, active cash management tool. Knowing your daily cash position as well as your weekly cash commitments will give you added impetus to collect money and/or to generate revenues. You can then take the information generated in the daily cash report and incorporate the information into another useful tool, the Flash Report!

Why use a daily cash report? Often CFO/Controllers when facing a cash crunch manage cash by reviewing the online bank balance. Though easy to do this number is not accurate. It does not take into consideration outstanding checks. Another symptom of a cash crunch is that accounting falls behind in processing information. By preparing this daily cash flow forecast or projection you force the accounting department to stay current with posting transactions.

Cash Flow Forecast

This tool is also helpful when used in conjunction with the Thirteen Week Cash Flow Projection. It is helpful to think of the 13-Week Cash Flow Report as giving you the strategic big picture needs. Conversely, the Daily Cash Flow Report provides a more tactical level measure of your firm’s cash position. You can tie a week’s worth of cash receipts and cash disbursements as reported in the Daily Cash Report to the 13- Week Cash Flow Report.

The Daily Cash Report is updated daily and should not take more than thirty minutes to prepare. However, there is some element of planning involved insofar as weekly cash commitments are concerned. If the company is in a severe cash crunch, you may need to negotiate with vendors about partial payments.

Prepare the Daily Cash Report in the morning of each workday. Use the information on the report to help you manage cash for the day that you prepare it.

Managing your cash flow is vital to a business’s health. If you haven’t been paying attention to your cash flow, access the free 25 Ways to Improve Cash Flow whitepaper to learn how to can stay cash flow positive in tight economies. Click here to access your free guide!

Daily Cash Position

This purpose of this section is to give you the cash position at the start of the day as per the G/L balance. The cash position for the start of today is the same as the ending cash balance from the last business day. Hence, the report you update and start off with at the beginning of today will be on the information from the last business day. (Reminder: this report is prepared the following day of the reporting period.)

After obtaining the starting balance for the last business day, we need to capture cash inflows. The third piece of financial information you need to obtain is information on cash disbursements from the last business day.

Sum up these elements together to obtain the ending cash balance for the last business day: Reconciled Balance + Total Deposits – Total Disbursements = Cash Balance.

Incoming monies from yesterday Disbursements (Insert Date from 1 business day ago)- Payroll Fees – AP Checks – Other Disbursements = Total Disbursements

ENDING CASH BALANCE AS OF : This is also the Beginning Cash Balance for TODAY. Reconciled Balance + Total Deposits – Total Disbursements.

Weekly Cash Position

The weekly cash position gives management an estimate of how much incoming cash and cash disbursements the company expects to have for the entire week. Remember, this is an estimate only. It should be updated periodically so that the company improves on the estimate. Your company may prefer to have a separate line item for certain significant cash disbursements. As long as the overall report is kept as simple as possible, this is acceptable.

Managing Payables

The CFO/controller will need to list the different vendor/suppliers that the company intends to pay for the week. During times of extreme cash shortage, it may be helpful to make a note of which vendor/suppliers are of high priority.

Daily Cash Report Monitor & Review

The Daily Cash Report should be monitored and reviewed on a daily basis in situations where cash management is big key part of company survival. A key part to focus on is the estimate of weekly cash deposits. Monitoring and reviewing the cash deposits will improve the accuracy of the estimates. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

Daily Cash Report

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What Is Dilution

See Also:
Financial Ratios
Accounts Receivable Turnover
How to collect accounts receivable
What is Factoring Receivables?
Working Capital

What is Dilution?

Dilution is any portion, regardless of why, of your receivables that you did not collect. This is important as the amount available from your line of credit with the bank is based on your outstanding accounts receivable balance. The bank wants to know the extent to which your receivables are likely to be turned into cash receipts. The greater the amount of dilution, the greater the risk to the bank and the less will be your available borrowing base.

The following are common causes of dilution and suggestions for remedying them.


Discounts offered to customers for faster repayment can increase your dilution rate. If these discounts account for a significant amount of dilution, you may consider other methods of encouraging faster repayment.

Collection costs

The greater the fees directly paid to collect on your receivables, the less of your receivables balance you will realize. This is worth examining to see if it has a material impact on your dilution rate. You may consider less costly collection services.

Bad debt

Receivables not collected due to the default or other negligence of the customer. This can be reduced through the establishment of tighter credit policies, such as more thorough credit checks prior to extending trade credit to customers.


Sometimes a customer may also be a vendor. In the course of paying an invoice it may seem attractive to you or them to net out the amount they owe you from the invoice’s total. You may want to end this practice depending on the amount of the dilution and its subsequent impact on your borrowing base availability.


Valuation Methods

See Also:
Financial Ratios
Required Rate of Return
Internal Rate of Return Method
EBITDA Valuation
What is a Term Sheet?
Adjusted EBITDA
Multiple of Earnings
Business Valuation Purposes

Valuation Methods

There are a variety of approaches to valuing a firm and its equity. The two most popular approaches are discounted cash flow (DCF) methods and market earnings multiple based methods.

Discounted cash flow methods generally project future expected cash flows, discount the value of each of those flows to present value using a discounted rate, and then take the sum of those discounted values to represent the total value of the firm or the total value of the equity. This Free cash flow to the firm (FCFF) method arrives at a total firm value. Free cash flow to equity (FCFE) values the total equity in a firm.

Market earnings multiple methods typically project out a future adjusted earnings amount for the next twelve months. This earning amount typically uses EBITDA (earnings before interest, taxes, depreciation, and amortization) or net income and then multiplies that earnings estimate by a multiple which is within the range of what other similiar firms have sold for in recent transactions.

Valuation Methods Synopsis

As one might expect, valuations can often become complex. The subject of the proper discount rate has spawned numerous books itself. Valuation can also bring up contentious issues, particularly when the ownership interest represents a controlling stake or there is a less than liquid market for that interest.

When a valuation becomes complex, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

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