Your company closed the year with solid EBITDA. The margins look good on the report. And yet, at month-end the cash isn’t there.
This is one of the most common — and most misunderstood — symptoms in mid-market industrial companies. And it has a very concrete explanation.
EBITDA is not cash
EBITDA measures how much your business generates before interest, taxes, depreciation, and amortization. It’s a measure of operating profitability. Useful, but incomplete.
The problem is that EBITDA doesn’t capture what happens on the balance sheet. And the balance sheet is where your real cash lives.
The three lines that are eating it
1. Accounts receivable (AR)
Every time you sell to a customer on 60 or 90-day credit terms, you’re financing their operation. That money is in the EBITDA — it’s already been “earned” on paper — but it’s not in your bank account.
If your sales grow, your AR also grows. More EBITDA, less cash.
2. Inventory
Inventory is immobilized capital. Every dollar you have in raw materials, work in process, or finished goods is a dollar that isn’t working.
Industrial companies tend to carry larger inventories than necessary: due to supply chain uncertainty, purchasing negotiations, or simply habit.
3. Accounts payable (AP)
This is the positive side of working capital: how long you take to pay your suppliers. If you pay at 30 days but collect at 90, you’re putting 60 days of capital out of your own pocket.
How to measure it
The difference between EBITDA and cash generated is called cash conversion. The simple formula:
Cash generated = EBITDA − Δ Working capital − Capex
If your working capital grew $10M this year because your customers took longer to pay and your inventory increased, that $10M came out of your cash — even though it doesn’t appear on the income statement.
What to do about it
The first step is to measure. Calculate your cash conversion cycle:
CCC = Days of inventory + Days of AR − Days of AP
A CCC of 90 days means your company needs to finance 90 days of operations with its own capital before seeing a dollar from your customers.
Reducing that number by 15 or 20 days in a mid-market industrial company can free up several million dollars in cash — without selling more, without cutting costs.
Want to calculate your company’s CCC? The Sintelo diagnostic includes this analysis as a starting point.