Cash EBITDA vs. EBITDA: A Comprehensive Guide for Business Owners

Kimberly Green | 2024-12-09

Sam Parr’s tweet sparked a lively debate about whether EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a flawed metric for business owners, particularly in industries like SaaS. He proposed an alternative— Cash EBITDA —as a better reflection of a business’s financial health. But is it? Why don’t more businesses adopt it? And what do accountants, entrepreneurs, and investors think about this idea? In this post, we’ll explore: The differences between EBITDA, Cash EBITDA, and other financial metrics. Why EBITDA remains a popular metric despite its limitations. The case for alternative cash-based metrics. Practical advice on financial metrics for business decision-making. [img width=573.003px]//5ac7a397a9cdce6ee24685b64d3ecb28.cdn.bubble.io/f1734124218444x764338244162498400/richtext_content.png[/img] Understanding Cash EBITDA What is EBITDA? EBITDA measures a company’s profitability by excluding non-operational expenses like interest, taxes, depreciation, and amortization. It’s a standardized metric often used to: Compare operational performance across industries. Assess a company’s earning potential without the noise of financing or accounting decisions. Evaluate a business for acquisition or investment purposes. However, critics like Charlie Munger have famously referred to EBITDA as “bullsh*t earnings.” Why? Because it ignores critical factors like capital expenditures (CapEx) and cash flow, which can paint a misleading picture of financial health. A company might have strong EBITDA but still struggle with cash flow issues that threaten its survival. What is Cash EBITDA? Sam Parr’s proposed Cash EBITDA modifies traditional EBITDA by: Subtracting all non-cash expenses. Recognizing revenue when cash is collected (rather than spreading it over the contract term, as accrual accounting requires). For example, a SaaS company charging $1M annually upfront would report $83K in monthly revenue under traditional EBITDA. In Cash EBITDA, the entire $1M collected upfront would count immediately, minus costs for that month. Here's how the blog post draft would look like, starting with the introduction and structuring the content to address both Sam Parr's tweet and the insightful comments. The Argument for Cash EBITDA 1. Cash is King As several Twitter commenters pointed out, cash flow is critical for a company’s survival. Even profitable businesses can fail if they lack liquidity to cover operational costs. Metrics like Cash EBITDA or Operating Cash Flow focus on actual cash movements, helping business owners: Track liquidity. Make better...