What is EBITDA and Cash Operating Profit? Here's What Every Business Owner Needs to Know!

Unlock the financial secrets behind these two critical metrics for your business

Let’s imagine a small family business called “Anjali's Cafe.” Anjali runs the cafe with a dream of serving delicious snacks and beverages, and she makes a decent profit each month. But, like any business, Anjali needs to understand how much real money she's earning, and to do that, she needs to get a good look at her EBITDA and Cash Operating Profit.

What is EBITDA?

One day, Anjali notices a term on her financial statement: EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It sounds complicated, but let’s break it down:

EBITDA simply tells you how much money a business is making from its core operations (like serving food and drinks at the cafe), before taking into account things like interest on loans, taxes, and non-cash expenses (like the gradual wear and tear of her kitchen equipment).

So, Anjali’s EBITDA will show the actual earnings from the cafe’s regular activities, before all those deductions. It helps her see if her cafe is really profitable from its core business.

What is Cash Operating Profit?

However, Anjali also wants to know how much real, cash profit she’s making from day-to-day operations. This is where Cash Operating Profit comes in. It looks at the actual cash inflows and outflows involved in running the business. So, Anjali's cash operating profit is calculated by removing non-cash expenses, like depreciation (the cost of her old coffee machine over time), from the EBITDA.

In simpler terms, EBITDA shows her overall operating profit, while Cash Operating Profit tells her how much actual cash she has earned after accounting for non-cash expenses. Both numbers are important for Anjali to understand whether her cafe is running smoothly and if she has enough cash to pay for bills, expand the business, or save for the future.

In conclusion, while EBITDA helps understand overall business health, Cash Operating Profit gives a clearer picture of how much cash the business is actually generating.