January 2014

Why EBITDA is Not Cash Flow

Why EBITDA is Not Cash Flow

on?January 28, 2014?by?Cody Boyte


There is often a misconception that EBITDA is synonymous with cash flow. While most seasoned deal professionals are careful to remember the distinction, some company owners (or entry-level analysts) can benefit from a friendly reminder.

The EBITDA metric gained prominence with the arrival of the?LBO?industry in the 1980?s, as buyout firms used it to estimate how much debt a company could take on, a key component of the LBO strategy. While EBITDA has become standard in company valuation ? purchase prices and loan covenants are often quoted as multiples of EBITDA ? the metric is not uniformly defined under GAAP standards and its calculation varies from company to company. This variation can lead to disparities and misunderstandings about the true cash-generative abilities of a business.

EBITDA does not take into account any capital expenditures, working capital requirements, current debt payments, taxes, or other fixed costs which analysts and buyers should not ignore. The cash needed to finance these obligations is a reality if the business wishes to grow, defend its position, and maintain its operating profitability.

Here are three costs that are not included in the EBITDA calculation, and their omission tends to overstate operating cash flows:

Capital Expenditures

Certain industries like heavy manufacturing, shipping, aviation, telecom, clean technology and oil and gas require heavy ongoing or up front investments in equipment. EBITDA does not take into account capex, the line item that represents these significant investments in plant and equipment.?Ignoring capital expenses to inflate EBITDA by $3.8B precipitated the bankruptcy of WorldCom. Essentially, the company capitalized operating expenses, allowing them to be depreciated over time, thus decreasing operating expenses and boosting EBITDA.


?The biggest problem I encounter is an over or underestimation of capital expenses for asset-heavy companies such as trucking. Adding back all depreciation for a company like this without leaving an allowance for capex can grossly overestimate the available cash flow. However, not adding back any depreciation can underestimate the cash flow, especially if the company uses accelerated depreciation,? advises Axial Member?Jaime Schell?of?Plethora Businesses. There have been more insidious cases of companies manipulating depreciation schedules to inflate EBITDA, such as?Waste Management in the mid-nineties extending the useful lives of its garbage trucks and overstating their salvage value.

Working Capital Adjustments

Businesses need to invest revenue back into the company to keep expanding. EBITDA does not account for changes in?working capital?and the cash required to run the daily operating activities. Ignoring working capital requirements assumes that a business gets paid before it sells its products. Very few companies operate this way. Most businesses provide a service and get paid in arrears. Ideally a business collects up front for its services and pays in as much time as possible to remain as liquid as possible and to quickly reinvest cash into profitable investments like inventory purchases. This relationship between sources and uses of cash speaks to a company?s ability to take on more projects such as higher debt payments in the case of an LBO.

While EBITDA is useful in that it allows for a back-of-the-envelope comparison of two companies with similar business models or in the same industry, a?2000 letter to Berkshire Hathaway shareholders written by Warren Buffet?put EBITDA in its place: ?References to EBITDA make us shudder?We?re very suspicious of accounting methodology that is vague or unclear, since too often that means management wishes to hide something.?

David Simmons at Forbes magazine once called EBITDA the ?device of choice to pep up earnings announcements.? It does not exist in a vacuum and is irrelevant on a standalone basis. It does help when comparing similar companies under time constraints, but is by no means a thorough valuation tool when making an important investment decision.


compliments of?http://www.axial.net/



5 Signs You?re A Wantrepreneur

Posted on??by??Jeetbanerjee

Wantrepreneur aspiring to be an entrepreneur


Wantrepreneurs are individuals that desire to be an entrepreneur, but aren?t one yet. Don?t be embarrassed if you are in the wantrepreneur stage because it?s a place where many individuals find themselves stuck at.

A terrible thing would be to a wantrepreneur without even knowing so. You must first figure out the problem before you can find the solution.

Here are 5 signs you?re a wantrepreneur instead of an entrepreneur:

1. You Talk, But Never Act

We all know that one person who tells us that they have the next million dollar idea, but they never do anything about it. Ideas are 1% while execution is 99% of the game. A billion dollar idea is worth?nothing?if it?s still an idea.

Work hard in silence and let success make the noise. Nobody will take you serious as an entrepreneur until you put your thoughts and ideas into action. If you?re going to talk the talk, you have to walk the walk.

How To Overcome: Stop talking about your ideas with people and start showing them. You?ll never know how great your ideas and thoughts are until you put them into action.?

2. You Make Excuses

I?ve got a bunch of friends that have big entrepreneurial dreams, but they never get started. I ask them why and they shoot out a variety of different excuses. It seems like they put more thought behind their excuses than they do their business ideas.

School, money, time, responsibilities, family, activities, and all other excuses are just obstacles. You can?t expect to find time, you have to make time if you really want to become an entrepreneur.

How To Overcome: Instead of making excuses, take action. You can prolong your business ideas as much as you want, but tomorrow will?still have similar barriers.?


3. You Keep Asking People To Read Over Your Business Plan

I?m going to say this publicly, business plans don?t mean shit. They?re an overrated document hyped up by colleges so that they have something to teach you about at business school. I?ve never written a formal business plan in the last 4 years.

If you?re putting your ideas into writing hoping for someone to read over it, you?re a wantrepreneur. Your business plan just like your idea doesn?t mean shit until it?s put into action. See the common theme? You have to take action to be an entrepreneur.

How To Overcome:?Stop pestering people about your business plan because it?s just a waste of paper. Certain parts of a business plan are good for organizing your thoughts, but they should be for your use only.


4. Your Goal List Has Nothing Crossed Off

New Years resolutions are the funniest things. Most people make an amazing list of goals and resolutions only to forget about them by the middle of January. Just because you set goals doesn?t mean you?re an entrepreneur.

If you have a large list of goals that aren?t getting done, you aren?t progressing forward. You must be getting ahead in order to progress in life. Entrepreneurs make goals and crush them!

How To Overcome: Don?t set goals unless you plan to actually get them done. Get friends and family to hold you accountable with consequences?if you don?t accomplish your goals.

5. You?ll Do Anything But Sell?

There is another type of wantrepreneur that actually innovates and builds things out, but refuses to get sales. We call this person the wantrepreneur because they?re purely an innovator and not an entrepreneur.

Entrepreneur?s make business decisions to fuel their innovations. Sales is tough, but it?s the foundation of your companies success. You cannot avoid doing sales if you truly want to become an entrepreneur.

How To Overcome: There is nothing wrong with not enjoying sales. If you don?t like it, you can find other smart people to take over the?business side of your company and generate the sales that you need.?


This article isn?t about putting people down, but rather about to help them discover that they?re a wantrepreneur. You must know what?s holding you back before you can propel yourself forward.?


photo credit:?pierofix



Investing in Startups has Increased Significantly Over Recent Years

RockThePost?s 2013 Investor Trends Survey reveals interesting insights into the changing investment landscape and investment
attitudes among private investors today compared to 10 years ago. Upcoming regulatory changes with the JOBS Act will further
shape the investment world, allowing investors to invest in private companies for the first time in 80 years regardless of income
or net worth. The Investor Trends Survey also identifies some key characteristics of experienced angel investors ? those who
have experience investing in startups ? compared to non-angel or novice angel investors.
This special report contains a selection of the insights from RockThePost?s 2013 Investor Trends Survey, including:
? Investor portfolios consist of 15% more alternative investments now than 10 years ago
? Experienced angel investors have a lower percentage of mutual funds in their portfolios than novice and non-angel investors
? Investors are relying less on intermediaries to carry out their investments and more on direct investing methods
? The availability of investment tools, such as online trading platforms, and investors? experience with direct investing are the
main reasons they are encouraged to manage their portfolios.