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From EBITDA to Cash Flow
A Step-by-Step Breakdown of How EBITDA Is Adjusted to Arrive at Real Cash Flow
1. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Starting point: Reflects the operational profitability without considering non-cash and financing elements.
2. Depreciation and Amortization (D&A)
Although it's deducted to get net profit, it's a non-cash expense, so it's added back in the operating cash flow.
Formula: Net Profit + D&A → Operating Cash Flow Adjustment
3. Financial Revenues and Expenses
Interest income/expenses are included in net profit but not part of operational activities. They need to be excluded or reclassified.
Formula: Adjust for financial items → Operational Purity
4. Income Taxes
Taxes are deducted from net profit. Cash flow needs to reflect actual tax payments, not just accounting provisions.
Formula: Net Profit − Tax Payable + Actual Tax Paid → Adjusted Net Cash
5. Non-Cash Expenses
These include provisions, impairments, revaluations — they affect accounting profits but not actual cash.
Formula: Accounting Losses (non-cash) → Add Back to Cash Flow
6. AR Increase (Accounts Receivable)
If receivables go up, it means we sold something but didn't collect the cash. So, cash flow goes down.
Formula: ↑ Receivables → ↓ Cash
↓ Receivables → ↑ Cash
7. Inventory Change
Inventory purchases consume cash. If inventory increases, it reduces cash flow.
Formula: ↑ Inventory → ↓ Cash Flow
↓ Inventory → ↑ Cash Flow
8. AP Increase (Accounts Payable)
If we delay payments to suppliers, cash stays with us. So payables increase cash flow.
Formula: ↑ Payables → ↑ Cash
↓ Payables → ↓ Cash
9. Asset Acquisition and Disposal
Buying assets uses cash. Selling assets provides cash.
Formula: ↑ Fixed Assets → ↓ Cash
Asset Sale → ↑ Cash
10. Loan Activity (Financing Cash Flow Area)
- Loan Taken: Increases cash
- Loan Repaid: Decreases cash
- Dividends Paid: Outflow from financing activities
Formula: New Loans → ↑ Cash | Repayments/Dividends → ↓ Cash
11. Final Cash Flow
All these adjustments bring us from EBITDA to the real net cash flow of the business.
Summary Formula Flow:
EBITDA
→ Adjust for D&A
→ Adjust for financial income/expenses
→ Adjust for tax payments
→ Add back non-cash losses
→ Subtract ↑ in AR & Inventory
→ Add ↑ in AP
→ Subtract asset acquisitions
→ Add proceeds from asset sales
→ Adjust for financing flows (loans/dividends)
= Cash Flow