IRR, Payback, NPV and Parents for Financial Decisions
Are IRR and payback really always so bad for financial decision-making? Why do so many people use them if NPV is so much better? IRR and payback are not bad for financial decision-making. They provide you with different information about a potential investment or project than does NPV. To the academics of finance and accounting, […]
EBITDA Is Not Operating Cash Flow
EBITDA is often treated as a proxy for operating cash flow by finance professionals. While EBITDA is an important finance metric, it is not the same things as operating cash flow. For small businesses, the difference between them is especially important. Here’s an example. Windmill Bakery had a great year. Their income statement shows the […]
EBITDA is (Earnings Before Interest, Taxes, Depreciation and Amortization) a metric used by financial professionals to estimate a company’s profitability by stripping out non-cash expenses. EBITDA makes it easier for finance professionals to compare different companies across different industries. It helps convert an apples to oranges comparison to an apples to apples comparison. EBITDA gets […]
Net working capital is current assets less current liabilities. When current assets are greater than current liabilities, then net working capital is positive and vice versa. The main components of net working capital are cash, inventory, receivables and payables. A small business can intentionally invest in net working capital to make a change in net […]
There are 2 types of cash flow that help a financial manager assess the financial condition of a small business. The first is operating cash flow, and the second is free cash flow. Operating cash flow is earnings before interest plus depreciation minus taxes. You can find this directly on a small business’s cash flow […]
