All Posts
No items found.

EBITDA vs. Free Cash Flow: Which Metric Matters More?

EBITDA vs. free cash flow are two financial metrics that often find themselves head-to-head for companies between $2 million and $10 million in revenue. Which is better?

May 24, 2024

In the world of scaling your business, two financial metrics often find themselves head-to-head — EBITDA vs. free cash flow. These two financial heavyweights each claim to be the ultimate measure of a company’s performance, but is that true? 

What’s the difference, and which one is better? Let’s find out! Below, you’ll learn: 

  • What EBITDA is, plus its pros and cons
  • What free cash flow is, plus its pros and cons
  • Which is the better metric to base business decisions on 
  • How a fractional CFO can support these metrics 

EBITDA Is Mostly About Profitability 

EBITDA is short for Earnings Before Interest, Taxes, Depreciation, and Amortization. 

While this metric has its critics, it’s still a widely used and appreciated metric for founders and CEOs looking to understand their company’s operational efficiency and profitability potential. 

Your company can’t survive if you aren’t generating profits, and EBITDA eliminates the noise and offers a clear picture of your earnings without things like interest expenses and tax rates. From there, you can more accurately assess your strengths and areas of improvement. 

Let’s look at some key advantages of leveraging EBITDA as a financial metric. 

Apples-to-Apples Comparison Across Companies

By stripping away things like tax environments, interest expenses, accounting policies, and more, you can easily compare your operating performance against competitors. EBITDA is beneficial when looking at acquisition targets or benchmarking against industry competitors. 

A Signal For Investors 

EBITDA reveals your company’s raw earning power and indicates your ability to generate cash. It’s a valuation tool for investors to assess your company’s value relative to performance because it indicates whether you’re generating enough money to survive long-term. 

An Early Warning System

Paying attention to financial metrics like EBITDA means you can see early red flags that signal potential issues before they become huge problems. While EBITDA can signal that you need to course-correct, you shouldn’t use it as your only metric to inform decision-making. 

The Downside of EBITDA

While EBITDA gives you a glimpse into your operational efficiency, it has limitations. You don’t want to over-rely on this metric because it can be dangerously misleading. Let’s look at some of the downsides of using EBITDA to assess your business's health and future. 

It Ignores Critical Expenses

EBITDA means removing interest, taxes, depreciation, and amortization, but those expenses are very real business costs. Those expenses have a direct impact on profitability and cash flow, and ignoring them can hurt your business in the long run. 

EBITDA Isn’t Cash Flow

People often mistake EBITDA for cash flow, but they aren’t the same thing. Even worse, if you view them as the same thing, you could inflate your numbers, and they won’t accurately represent your actual capabilities of generating cash. Without healthy cash flow, you can’t make investments, service your debt, or provide returns to shareholders. 

It Paints an Unrealistic Picture of Your Financial Situation

EBITDA can hide your organization’s debt and create a situation where you can inflate revenues and distort your value. You don’t want EBITDA as your single source of truth because it’ll blind leaders to operational realities and future risk. 

Free Cash Flow Is All About Cold Hard Cash 

Free cash flow is the only money that’s “free” within your organization. That means you can invest in growth initiatives, debt repayments, dividends, and other strategic decisions. As a founder or CEO, it’s one of the most important metrics you can track. While EBITDA reveals your cash-generating abilities, FCF shows you the real numbers after accounting for operating expenses, taxes, and other business expenses. 

Let’s look at some of the upsides of using free cash flow as a metric for the health and success of your business. 

An Accurate Measure of Profitability

EBITDA can be mistaken for being all about profitability, but its profitability based on gross margins. Free cash flow strips away distortions and non-cash expenses, so you can see how much cold, hard cash is left over for everything else that’s necessary to grow your business. 

Safety During Hard Times

Economic headwinds are inevitable when you’re playing the long game. Surprises happen on an individual business level, and they also occur on a macro level. Free cash flow gives you a safety net to navigate hard times and economic downturns, ensuring you make it to the other side. 

Cash Flow Leads To Growth

Positive free cash flow means you have money to invest in your organization’s future. You can reinvest it in R&D, sales and marketing, and other strategic initiatives that give you a leg up against competitors. 

Investors Are Watching This Metric

If you’re looking to fundraise or plan for an exit, the people on the other side will look at this metric. Why? Because it tells them whether you’re building a sustainably profitable company. It shows that your company can provide good returns on their investments. 

The Drawbacks of Free Cash Flow As a Solo Metric

If you’re relying solely on free cash flow to determine the health of your business, you might be setting yourself up for problems. Yes, it provides valuable insights into your company’s financial health and ability to weather the storms, but focusing only on a single metric can distort the bigger picture. 

Let’s dive into some pitfalls of relying too heavily on free cash flow to make business decisions. After we check out the cons, we can look at EBITDA and free cash flow head-to-head to determine the best metric for evaluating business success. 

Short-Term Mindsets Are Misleading

Free cash flow may change week-to-week, month-to-month, and quarter-to-quarter. It’s volatile, so you want to track other metrics and take a zoomed-out look at this metric to determine what’s going on. A bad month might give a false signal that you have a problem, but if you’ve got positive long-term free cash flow, pay attention to that. 

Cash Flow Isn’t Always King If You’re In Hyper-Growth

Negative free cash flow is expected if you’re a hyper-growth company. It’s hard to be profitable when investing in massive growth opportunities, and things are moving fast. If you’re a hyper-growth company, prioritizing free cash flow can actually stunt your long-term growth potential. 

Manipulation and Wrongly Prioritizing Can Hurt You

If you’re focusing too heavily on short-term free cash flow, you increase your risk by ignoring the balance sheet. Also, calculating free cash flow requires accurate reporting and forecasting. So, if you aren’t classifying expenses properly, it could lead to a manipulated number and problems down the line. 

Which Is Better: EBITDA or Free Cash Flow

EBITDA and free cash flow are only single pieces of the puzzle. You don’t want to prioritize one too heavily over the other, and instead, pay attention to several performance indicators like profitability, revenue growth, market trends, etc. 

The most successful founders and CEOs take a balanced approach. While EBITDA vs. free cash flow each has its strengths and weaknesses, you can view these as a dynamic duo, complementing each other and providing a more comprehensive view of your business’s financial health. 

EBITDA can help identify areas of operational improvement and cost optimization; free cash flow gives you a more accurate representation of your organization’s ability to generate real cash. 

How a Fractional CFO Can Help With Both Metrics

As your company scales, the financial metrics you monitor and optimize for become increasingly critical for making strategic decisions and investments. No single number will ever tell the complete story of your business. Hiring an experienced fractional CFO can provide immense value, leveraging a holistic view of your organization to provide financial transparency and help drive sustainable growth. 

A Performance Management Framework

At Lineal, our fractional CFOs provide a unified performance framework, leveraging insights from EBITDA and free cash flow, along with accurate reporting, KPI tracking, budgeting, and more. Using a multi-faceted approach, we keep a financial pulse on your business so you can course-correct as needed. 

As an established market leader or a high-growth startup, you want to be able to make data-driven decisions that balance short-term profitability with long-term sustainable growth. 

A fractional CFO can use EBITDA to pinpoint areas for improvement and optimize operational profitability and then tap into free cash flow metrics to drive sustainable expansion and unlock untapped opportunities. 

So, which is better, EBITDA vs. free cash flow? Neither or both, depending on how you look at it. The more information you have about your company’s financial situation, and from all angles, the better off you’ll be. 

The Top 5 NetSuite Cloud Features to Future-Proof Your Business 

Tackle the biggest pain points for scaling your business with these top 5 scalable NetSuite Cloud features. 

7 NetSuite Issues and How to Fix Them Quickly

NetSuite is a powerful tool, but like any software, it has its own challenges. Learn how to solve the seven most common NetSuite issues. 

What is Netsuite and Why Do So Many Startups Choose It

What is NetSuite, and why do so many startups love it? There are many reasons, so keep reading to learn how NetSuite can solve your biggest pain points. 

A Must-Do Checklist for Year-Round Bookkeeping Compliance 

If you want your business to remain financially healthy, follow this monthly, quarterly, and yearly checklist for year-round bookkeeping compliance. 

5 Benefits of Using Netsuite for Financial Reporting and Analysis

You can transform your business trajectory using NetSuite for financial reporting and analysis. Keep reading to learn about the 5 benefits of using this ERP system. 

Is Netsuite Right For Your Growing Company

Every company is unique and requires different processes and workflows to reach the next stage of growth. Keep reading to learn if NetSuite is right for your growing business. 

Basic Bookkeeping vs. Advanced Financial Management: Which One Do You Need?

Does your business need basic bookkeeping or advanced financial management? Keep reading to find out. 

7 Ways a Fractional CFO Minimizes Tax Risk

Constantly changing tax laws and regulations can overwhelm a growing company. Learn these seven ways a fractional CFO minimizes tax risk.

6 Ways a Fractional CFO Can Secure Funding For Your Business

Securing funding for your business isn’t a walk in the park. It requires strategy, financial expertise, and accurate financial data to tell a compelling financial narrative. Here’s how a fractional CFO can help. 

5 Tips for a Successful NetSuite Implementation

Successful NetSuite implementation is about people, processes, and technology. Follow these five tips to drive your business forward. 

How Much Does A Fractional CFO Cost? 

How much does a fractional CFO cost? Let’s answer many founders’ most pressing questions about making this critical hire. 

How to Cut Costs, Not Corners with an Outsourced CFO

How can you cut costs for your startup without hiring a full-time CFO? A fractional CFO is the answer and here’s why. 

4 NetSuite Hacks To Optimize Your Supply Chain

To gain a competitive advantage in today’s fast-paced world, you have to stay on top of supply chain challenges. Utilize these 4 NetSuite hacks to optimize your supply chain and boost your bottom line. 

7 Common Bookkeeping Mistakes That Hurt Profitability From A Fractional CFO

Are you making these seven common bookkeeping mistakes that are hurting your profitability? Follow the tips in this blog post to protect your bottom line. 

6 Budgeting Tips for Business Success from a Fractional CFO

Read these 6 budget tips to help you define a clear financial roadmap for every decision you make as a company, and to drive a culture of financial accountability. 

Top 7 Reasons Mid-Market Leaders Choose NetSuite’s Cloud ERP

If you’re managing complex financial situations on outdated systems, it’s time to upgrade to this customized-to-fit-all solution of NetSuite’s Cloud ERP. 

When Is The Right Time To Hire A Fractional CFO

When is the right time to hire a fractional CFO? When you meet at least one of these five criteria.

The 7 Best Tax Strategies for Scaling Businesses from a Fractional CFO

As a business, you want your money working for you as efficiently as possible. Follow these 7 best tax strategies to reduce tax liability and grow your business. 

5 Financial Metrics Every CEO Should Track

If you do a Google search on important financial metrics for your business, you’ll come up with dozens of “must-have” metrics. But you only need 3-5 to succeed!

10 Ways NetSuite Helps Optimize Cash Flow and Minimize Burn Rate

Are you a founder or CEO struggling with cash flow problems and an out-of-control burn rate? Read the top 10 ways NetSuite can help solve all your biggest financial problems within a single solution.

3 Signs Your Business Is In Desperate Need of a Fractional CFO

Do you have leaky cash flow problems, inaccurate forecasting, and a general lack of time or money to manage your organization’s financials? It may be time to hire a fractional CFO to save your business.

Solid financial reporting can help attract debt and equity financing

Financial reporting plays a key role when a business needs funds for continued operations and strategic investment opportunities.

Did your business buy the wrong software?

No one likes to make a mistake. This is especially true in business, where a wrong decision can cost money, time and resources. According to the results of a recent survey, one of the primary ways that many companies are committing costly foibles is buying the wrong software.

Best practices for M&A due diligence

Participating in mergers and acquisitions (M&A) offers growth opportunities for businesses, but also comes with its share of risks. It's crucial for buyers to have a thorough understanding of the strengths and weaknesses of potential partners or acquisition targets before proceeding with any deals.

Perform an operational review to see how well your business is running

In the wide, wide world of mergers and acquisitions (M&A), most business buyers conduct thorough due diligence before closing their deals. This usually involves carefully investigating the target company’s financial, legal and operational positions.

Tax-favored Qualified Small Business Corporation status could help you thrive

Opting to run your small enterprise as a Qualified Small Business Corporation (QSBC) might be a smart tax strategy.

Navigating Year-End Finances: A Real Estate Broker’s Guide to Cost-Effective CPA Solutions

As a real estate broker, you're accustomed to navigating complex deals and managing a multitude of tasks. However, when it comes to managing year-end finances, even the most seasoned brokers can find themselves in murky waters

Unleashing the Power of NetSuite: Why Your Business Needs an Expert CPA Firm

In the realm of business management, NetSuite stands out as a powerful tool designed to streamline operations and enhance financial visibility.

Financial Mastery Without Full-Time Costs: The Strategic Edge of Fractional CFOs for Tech Leaders

In the ever-evolving landscape of the tech industry, where innovation is the currency of success, financial management plays a pivotal role in shaping the trajectory of your tech firm.

New Year, New Numbers: Top 10 Accounting Priorities for a Smoother Tax Season

As the calendar flips to a new year, business owners find themselves at the threshold of a crucial period—tax season

Countdown to Tax Time: Affordable CPA Strategies for E-Commerce Success

As an e-commerce business owner using the powerful NetSuite platform, the countdown to tax time can bring both anticipation and anxiety.

Key 2024 inflation-adjusted tax parameters for small businesses and their owners

The IRS recently announced various inflation-adjusted federal income tax amounts. Here’s a rundown of the amounts that are most likely to affect small businesses and their owners.

Best practices for effective board meeting minutes

If you think the recorded minutes of your nonprofit’s board meetings are just a formality, think again

Businesses: Know who your privileged users are … and aren’t

Given the pervasiveness of technology in the business world today, most companies are sitting on treasure troves of sensitive data that could be abducted, exploited, corrupted or destroyed

Accounting for M&As

Business merger and acquisition (M&A) transactions have significant financial reporting implications. Notably, the company’s balance sheet will look markedly different than it did before the business combination.

Using QuickBooks to prepare 2024 budgets and forecasts

As year end nears, many businesses and nonprofits are planning for 2024. QuickBooks® provides budget and forecast features to help management make financial predictions, as well as assess “what if” scenarios to help make more-informed business decisions.

Tips for QuickBooks users: 5 mistakes to avoid during bank reconciliation

Reconciling bank accounts is critical to ensuring the accuracy of your company’s accounting records. The primary purpose of a bank reconciliation is to confirm that the transactions recorded in your bank statement match those shown in your accounting records.

Shareholder advances: Debt or equity?

From time to time, owners of closely held businesses might need to advance their companies money to bridge a temporary downturn or provide funds for an expansion or another major purchase

Revitalize Sales Strategies for the Digital Marketplace

E-commerce business owners, as the year draws to a close, you and your leadership team are likely fine-tuning your vision for 2024.

Maximizing Cash Flow in Real Estate: The Power of Cost Segregation Studies

Is your real estate business fully capitalizing on the depreciation of your property investments?

Some businesses may have an easier path to financial statements

There’s no getting around the fact that accurate financial statements are imperative for every business. Publicly held companies are required to not only issue them, but also have them audited by an independent CPA

Key Performance Indicators (KPIs) for SaaS Businesses: A Comprehensive Guide

Software as a Service (SaaS) has revolutionized the software industry. The transition from traditional software licensing models to subscription-based, cloud-hosted services offers businesses scalability, flexibility, and significant cost benefits

3 types of internal benchmarking (KPI) reports for businesses

As each year winds to a close, owners of established businesses can count on having plenty of at least one thing: information.

Are you ready for year-end inventory counts?

As year end approaches, it’s time for some calendar-year businesses to perform physical inventory counts. This activity is more than a time-consuming chore; it’s an opportunity to improve your company’s operational efficiency.