The Finance Gem 💎 Week #73: EBITDA, CFOs and KPI

THIS WEEK’S ISSUE AT A GLANCE

1. This issue’s finance Gems 💎 vote your favorite at the end of the newsletter.

• 10 Truths and 1 Lie about EBITDA

• 8 EBITDA Drivers to Know

• The CFO Checklist

• 12 Financial Skills for Managers

2. The Finance Gem has gone bi-weekly

Thousands of you reached out and answered polls over the past few months to suggest the length and frequency of the newsletter could be revised. I’ve listened and now The Finance Gem is published 2x per month or bi-weekly.

THIS WEEK’S FINANCE GEMS

1. 10 Truths and 1 Lie about EBIDA

10 Truths and 1 Lie about EBITDA

Can you spot the Lie?

1️⃣ EBITDA is a key metric in evaluating a company's operational efficiency.

True but it doesn't account for the significant cost of capital investments like property, plant, and equipment

2️⃣ It's commonly used in comparing company profitability

True but this comparison can be misleading if the companies have different capital structures or operate in sectors with varying capital intensity.

3️⃣ EBITDA helps investors understand cash flow available to pay off debt

True but it can overstate cash flow since it excludes the cost of replacing old equipment or investing in new capital projects.

4️⃣ Your company likely uses it to manage internal performance.

True but sole reliance on EBITDA can lead to underestimating the impact of needed capital expenditures and the cost of debt.

5️⃣ Your bankers use it to measure your ability to repay debt.

True but bankers often adjust EBITDA to ensure it more accurately reflects the ability to generate cash to service debt.

6️⃣ Your M&A firm will use it to value your business.

True - EBITDA should be used cautiously in valuation as it doesn't reflect the full financial health of a company, especially those with high debt levels.

7️⃣ EBITDA adjustments can be controversial, as they can significantly alter the perceived profitability.

True - these adjustments can often be used to artificially inflate a company's performance

8️⃣ It's a non-GAAP measure, meaning it's not standardized under Generally Accepted Accounting Principles.

True - this lack of standardization means that EBITDA can be calculated differently by different companies, making comparisons less reliable.

9️⃣ EBITDA doesn't give a complete picture of a company's financial health

True - ignoring capital expenditures can be particularly misleading in capital-intensive industries like manufacturing or telecommunications.

🔟 It's a good indicator of a company's short-term operational profitability.

True - while useful for short-term analysis, it's not a reliable measure of long-term profitability or cash flow sustainability.

❌ EBITDA provides a clear picture of cash flow.

Not true >>> EBITDA does not consider changes in working capital, which affect the actual cash flow available to the business.

A WORD FROM THIS WEEK’S SPONSORS

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2. 8 EBITDA Drivers to Know

The 8 Critical EBITDA Drivers Leaders Must Know

EBITDA is widely abused and mistakes can often cost companies millions (read more here: https://bit.ly/3VTdYpl)

EBITDA is also widely used in Valuations, Performance Management, Comparative Analysis and Commercial Financing.

So if you want to improve this metric, avoid making those mistakes, and manage these 8 critical drivers:

1️⃣ Revenue Growth

🎯 Sales & Marketing Excellence: cutting-edge sales and marketing strategies.

🎯 Market & Product Diversification: new markets and new products

🎯 Customer Lifetime Value Maximization: customer retention and upselling

2️⃣ Cost Optimization

🎯 Streamline Operations: streamline operations.

🎯 Lean Processes: continuous improvement methodologies.

🎯 Supplier Negotiations: lower suppliers lower input costs

3️⃣ Operational Efficiency

🎯 Process Automation: technology for process automation

🎯 Supply Chain Optimization: supply chain management to cut costs

🎯 Inventory Management: advanced strategies to reduce costs.

4️⃣ Pricing Strategy

🎯 Market-Based Pricing: pricing strategies tailored to market demand

🎯 Pricing Flexibility: price adjustments in response to cost dynamics

🎯 Dynamic Pricing: dynamic pricing for revenue optimization

5️⃣ Customer Retention

🎯 Relationship Building: strong customer relationships

🎯 Exceptional Customer Support: top-notch customer service

🎯 Feedback Systems: customer feedback to refine products and services.

6️⃣ Innovation & Digital Transformation

🎯 R&D Investment: research and development for new offerings.

🎯 Innovation Culture: workplace culture that values innovation

🎯 Digital Engagement Tools: digital solutions to enhance satisfaction.

7️⃣ Strategic Partnerships

🎯 Business Alliances: partnerships with complementary businesses to widen market access and improve EBITDA.

🎯 Joint Ventures: joint ventures for resource sharing, knowledge exchange, and risk mitigation.

🎯 Partnership Evaluation: assess the success of partnerships

8️⃣ Financial Management & Risk Mitigation

🎯 Debt Restructuring: optimize debt to reduce interest expenses and improve cash flow.

🎯 CapEx Optimization: capital expenditures driving value

🎯 Hedging Strategies: financial hedges to protect against price volatility

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With this fantastic bundle you get 10 checklists and cheat sheets that are going to dramatically upgrade your ability to make better strategic decisions to benefit your organization:  

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4. The CEO Checklist

5. The CFO Checklist

6. The CRO Checklist

7. The COO Checklist

8. The Management Cheat Sheet

9. The Business Governance Checklist

10. The Performance & Returns KPIs

3. The CFO Checklist

If you're a CFO or you want to become one, bookmark this.

Because all successful CFOs need to master Financial Management.

And I've prepared a strategic checklist across 15 key areas of the CFO role, to help you stay on track.

1. Budgeting and Forecasting: plan for the future and set a roadmap for growth.

2. Cash Flow Management: ensure enough liquidity is available for business operations and strategic initiatives.

3. Financial Analysis: understand the financial health of the organization and enable data-driven decision-making.

4. Working Capital Management: ensure efficient operations and optimal use of company short-term assets and liabilities.

5. Capital Structure: identify the optimal balance of debt and equity financing, to manage risk and minimize cost of capital.

6. Risk Management: anticipate potential financial risks and mitigate them.

7. Tax Planning: ensure the company is making best use of tax advantages and is in compliance with tax laws.

8. Financial Reporting: provide transparency to shareholders, regulators and other stakeholders.

9. Cost Accounting: provide insights into cost efficiency; control and reduce costs.

10. Investment Evaluation: assess new business opportunities and investments.

11. Financial Planning: support long-term sustainability and growth of the organization.

12. Mergers and Acquisitions (M&A): expand business operations and enter new markets.

13. ESG-Driven Financial Management: align the company's financial management with Environmental, Social, and Governance (ESG) factors, increasingly important in the global business environment.

14. People Management and Leadership: manage and lead people effectively.

15. Technology and Digital Transformation: leverage technology for efficiency, improved decision-making and strategic advantage.

4. 12 Financial Skills for Managers

Why they need them.

And how to get them.

1// Financial Statement Analysis

🎯 Understand and examine the basic financial statements (income statement, balance sheet, and cash flow statement) to assess your company's financial performance and position, and to identify relevant trends and patterns.

2// Budgeting and Forecasting

🎯 Create and manage a budget, and forecast future financial performance to anticipate risks and opportunities, make informed decisions and ensure the long-term profitability of your company or unit.

3// Break-even analysis (B/E)

🎯 Determine the point at which your company's revenues will equal its costs to identify when the your company will become profitable.

4// Cost-Volume-Profit (CVP) Analysis

🎯 Understand how changes in costs, volume, and price will impact your company's profitability.

5// Capital Budgeting (NPV, ROI)

🎯 Evaluate and select long-term investments in new equipment and facilities to optimize performance and ensure your company's continued growth and profitability.

6// Working Capital Management (W/C)

🎯 Balance collections, inventory stocks and payments to reduce your Cash Conversion Cycle without damaging client and supplier relationships, and without foregoing sales opportunities.

7// Financial Ratio Analysis

🎯 Calculate and interpret critical financial ratios (liquidity ratios, profitability ratios, debt service ratios and solvency ratios) to get insight into different aspects of your company's financial health.

8// Performance management

🎯 Establish goals, monitor progress, and provide feedback to align employee and organizational goals and increase your effectiveness as a manager.

9// Risk Management

🎯 Identify and manage financial risks (credit risk, market risk, and liquidity risk) and their impact on your company performance.

10// Leverage/Service/Coverage

🎯 Make informed decisions about both debt and equity financing to ensure your company has the appropriate funding and capital structure to support growth.

11// Performance Metrics (KPIs)

🎯 Monitor and manage profitability and cash alongside other relevant metrics like production efficiency, quality costs or customer net promoter score.

12// Business/Unit/Asset Valuation

🎯 Understand valuation drivers at the asset, unit/division and business levels to impact them effectively.

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