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You are here: Home » Blog » Financial Training » Operating Cash Flow (OCF) and EBITDA

By Joe Knight

Operating Cash Flow (OCF) and EBITDA

I’m just finishing up my semiannual New York to Hollywood NBCUniversal visit. Twice a year for at least the last four I have done two finance trainings in New York at 30 Rock and one in Hollywood at Universal Studios. What great venues to speak! I really enjoy working with the NBCUniversal group. My role in their training program is to provide a financials fundamental course as a kickoff for their Invest training program.

After my kickoff class the attendees have assignments and get to participate in webinars with several key finance executives over the next several months. They also do a business simulation and analyze a competitor as part of the program. The class is intended for key rising leaders in the organization. At NBCUniversal the training team does it right, great facilities and a well-organized program.

Cash Flow Statement TrainingThe three days this week were pretty typical, the classes are engaging with a lot of question and discussion. The questions always make the days go by fast. A big discussion point this week was understanding the focus at NBCUniversal on a metric called OCF or operating cash flow. This metric comes from NBCUniversal’s parent Comcast. It’s also very confusing. OCF is actually EBITDA the way it is reported by Comcast. So, when executives encourage these leaders to manager higher OCF, which is actually a number you can take directly from the cash flow statement, they really mean EBITDA which is a metric taken directly from the income statement. Seem confusing? It is.

Income Statement, Profit & Loss, P&L StatementEBITDA or earnings before interest, taxes, depreciation, and amortization is a key metric in the finance world. It is used in valuations, by bankers for loan covenants and by management as a simple number from the income statement that is an indicator for future operating cash flow. BUT EBITDA IS NOT ACTUAL OPERATING CASH FLOW. I wrote a toolkit for Harvard Business School Press on EBITDA (follow this link if you want to learn more….).

We learn from sad experience that metrics on the income statement like EBITDA can be manipulated and therefore may not match with cash at all. This was the case with the collapse of Worldcom. They manipulated their EBITDA to be able to justify loans to finance their acquisitions. When the fraud was discovered executives went to jail and the company went bankrupt. We learned from Worldcom and others that numbers taken from the income statement are loaded with estimates and assumptions and can be manipulated. One should always compare profit from the income statement to the cash generated on the balance sheet and cash flow statement. At the end of the day cash is king!

To wrap things up it was a good trip but I am tired. After two weeks in New York with a quick run to LA I’m ready for some break time from the travel. One real highlight of this week was the bacon infused Mahi Mahi tacos at Bar Bacon in New York, the chicken parmigiana at Trattoria Trecolori in New York and the blue fin tuna such at Kuru Kuru in Burbank. Good food and good times training.

Do you need business finance training?  Contact us at 818-591-5955 to talk about scheduling a training session.

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