Cash Flow vs. EBITDA: Guide to the Differences

Susan GuilloryUpdated September 12, 2022

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EBITDA (earnings before interest, tax, depreciation, and amortization) and cash flow are often used interchangeably to determine a company’s profitability or liquidity. But, while they have similarities, they are not the same thing.Both operating cash flow and EBITDA track the cash flow generated by a business's operations and ignore cash flow from investing or financing activities. However, that’s where the similarities end. EBITDA doesn't factor in interest paid on debt or income taxes, whereas operating cash flow does, since they are cash expenses. Read on for a closer look at EBITDA vs. cash flow, how each metric is calculated, what they can tell you about your business, and how they compare.

What Is Cash Flow?

Generally speaking, cash flow is the money — the cash — coming into and going out of your business. That includes revenues, income from interest and investments, and royalties (coming in); and business expenses like rent, inventory, payroll, and marketing (going out).Positive cash flow indicates that a company's liquid assets are increasing, enabling it to pay expenses, cover obligations, reinvest in its business, and provide a buffer against future financial challenges. There are two main types of cash flow: operating and free cash flow. Let’s look at the differences.

Operating Cash Flow vs. Free Cash Flow

The term “cash flow” often refers to operating cash flow, which describes money flows involved directly with the production and sale of goods from a firm’s core operations. Operating cash flow indicates whether or not a company has enough funds coming in to pay its operating expenses. For a company to be viable for the long term, operating cash flow must be positive, meaning there is more operating cash inflow than outflow. Operating cash flow is calculated by adding depreciation and amortization back to net income, as well as changes in accounts payable and receivable. It is recorded on your cash flow statement quarterly and annually.Free cash flow, on the other hand, refers to all the cash available before paying capital expenditures like debts, dividends, and shares. Free cash flow shows what money the company has left over to expand the business or return to shareholders, after paying dividends, buying back stock, or paying off debt.

How Is Cash Flow Calculated?

How you calculate cash flow varies depending on whether you’re looking at operating or free cash flow.To calculate free cash flow, the formula is:Free Cash Flow = Operating Cash Flow − Capital ExpendituresOperating cash flow is typically calculated using the indirect method, which is:Operating Cash Flow = Net Income + Depreciation & Amortization – Increase in Net Working Capital

What Is EBITDA?

EBITDA, which stands for earnings before interest, tax, depreciation, and amortization, is a measurement of a company’s operational profitability. Because EBITDA looks to measure only the operations of a company, it removes non-cash expenses (depreciation and amortization), financing decisions (interest on debt), and taxes. EBITDA can be particularly helpful for comparing the profitability of two companies in the same industry that may have different capital structures. And, though this performance metric is not approved by GAAP (generally accepted accounting principles), it is often used by investors and lenders to assess the value of a company and/or its ability to service debt.If you want to go deeper, you can look at gross profit vs. EBITDA and EBITDA vs. operating income to understand how those financial concepts relate to EBITDA.

How Is EBITDA Calculated?

Calculating EBITDA is fairly straightforward. You take your net income and then add interest, tax, depreciation, and amortization to that number.EBITDA = Net Income + Depreciation + Amortization + Tax + InterestA company's income statement, cash flow statement, and balance sheet all provide the information you need to calculate EBITDA.Recommended: Revenue vs EBITDA Explained

Cash Flow vs. EBITDA

While there are some similarities between EBITDA and operating cash flow, there are also a number of differences to be aware of.

Similarities

Both track the cash flow generated by a business's operations and ignore cash flow from investing or financing activities.
Both are used to determine how a company's core operations are performing.
Both add back depreciation and amortization to net income.

Differences

EBITDA doesn't factor in interest or taxes, whereas operating cash flow does, since they are cash outflows.
Operating cash flow factors in changes in working capital (a business’s current assets minus its current liabilities): the EBITDA formula does not.
Operating cash flow can show the signs of poor financial management, while EBITDA does not.

	EBITDA	Operating Cash Flow
Factors in interest or taxes	X	✓
Adds back depreciation and amortization to net income	✓	✓
Tracks cash flow generated by a business's operations	✓	✓
Factors in changes in working capital	X	✓
Show how a company's core operations are performing	✓	✓
Show the signs of poor financial management	X	✓

If you’re thinking about applying for a small business loan or taking on investors, it may be helpful to calculate both EBITDA and operating cash flow so you can paint a full and accurate picture of your company’s performance and profitability.

Cash Flow vs. EBITDA Example

To better illustrate EBITDA vs. cash flow, let’s look at an example using company XYZ, and figures taken from their income and cash flow statements.Net income: $500,000Interest paid on debt: $125,000Taxes paid: $200,000Depreciation and amortization expenses: $150,000Changes in working capital accounts:

Accounts receivable = ($200,000)
Inventory = ($100,000)
Accounts payable = $50,000
Accrued expenses = $25,000

Let’s first calculate the EBITDA for company XYZ.EBITDA = Net Income ($500,000) + Interest ($125,000) + Taxes ($200,000) + Depreciation and Amortization ($150,000)EBITDA = $975,000Now, let’s calculate XYZ's operating cash flow.Operating Cash Flow = Net Income ($500,000) + Depreciation and Amortization ($150,000) - Changes in Net Working Capital (225,000)Operating Cash Flow = $425,000

Pros and Cons of Using Cash Flow

Pros	Cons
Tells you the liquidity/actual cash position of the company	Based on historical costs, so doesn’t indicate future cash flows
Tells whether a company can generate sufficient positive cash flow to maintain and grow its operations	Industry comparison is not possible
Investors and lenders often prefer it to net income, since it's adjusted for depreciation, receivables, and liabilities	Doesn’t tell you the profitability of a firm

The Takeaway

Cash flow varies in many ways from EBITDA, though both are good to be aware of. EBITDA aims to establish the amount of cash a company can generate before accounting for any additional assets or expenses not directly related to the primary business operations. Operating cash flow, on the other hand, is a measure of the amount of cash generated by a company's normal business operations. Both performance metrics may be analyzed by a lender when you apply for many types of small business loans. And, both can help you understand the financial health of your business, which in turn helps you make smart financial decisions for your company,

3 Lantern Small Business Loan Tips

Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Photo credit: iStock/CandyRetriever

Frequently Asked Questions

Is cash flow or EBITDA a better metric?

What is the difference between free cash flow and operational cash flow?

Is it possible for EBITDA to be higher than cash flow?

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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