It's All About EBITDA (Duh!)

Many years ago, when I took a business finance class in college, our professor announced: “Today, class, we are going to talk about that dirty little word called EBITDA.” Being a rather naïve kid from Lancaster County, Nebraska, I must say that I got a bit giddy about the prospects of this lecture, especially since a couple of cute cheerleaders were my class.

Well, it didn’t take long to figure out that this lecture had nothing to do with the thoughts that I had conjured up in my testosterone-driven imagination. The “dirty little word” my professor had referenced had to do with a company’s earnings before interest, taxes, depreciation, and amortization, or EBITDA.

Having been in business for almost 40 years now as a manager, executive, and owner, I have come to realize the significance of the insignificance assigned to this subject in that finance class. I’ve come to understand EBITDA as one of the most important metrics for measuring management’s performance, as well as a company’s true value.

While it may be hard to believe, the following statement is from a conversation that I had with a certified public accountant who was the financial manager at a troubled company with which my firm was consulting: “Look, I don’t know how we could be out of cash when our profit-and-loss statement shows us as having made a profit.” The company didn’t have enough cash to pay the bank the interest it owed, or to pay normal operating expenses, including payroll at the end of the week. Yet this accountant was in disbelief that his company was in dire straits because the profit-and-loss statement showed a profit.

Luckily, my professional instincts overruled my native instincts (I didn’t blurt out, “Look, you economic illiterate! Profit on a P&L doesn’t equal cash. It’s all about EBITDA, and your lack of understanding makes you an EBIT . . . fool!”) Instead, I patiently explained that the profit-and-loss statement is so full of Financial Accounting Standards Board rules, accruals, noncash charges such as depreciation and amortization, and other accounting padding that in the end, it really doesn’t tell you the amount of blood (cash flow) that is running through the veins of your company.