Business Money Advanced
EBITDA, balance sheets, working capital, runway and what a business is worth.
Play lesson 1 freeEBITDA, balance sheets, working capital, runway and what a business is worth. Read company accounts with confidence, in bite-size games.
EBITDA = operating profit + depreciation + amortisation: trading performance before loans, tax and wear and tear. It isn't cash. Your one action: take any P&L you can find (even a made-up one) and work out its EBITDA by hand.
EBITDA ignores equipment replacement, interest, tax and working capital; 'adjusted' EBITDA can hide even more. Your one action: next time you see an adjusted figure, list every add-back and ask whether it will happen again next year.
Depreciation spreads the cost of physical assets over their useful life; amortisation does the same for intangible ones. The cash still left on the day you paid. Your one action: pick something you own that wears out and work out its yearly depreciation.
The balance sheet is a snapshot: assets = liabilities + equity. Current means within a year; non-current means longer. Your one action: write a mini balance sheet for yourself: what you own, what you owe, and what's left.
Working capital = current assets − current liabilities. The current ratio divides them; the quick ratio leaves out stock. Your one action: list everything you'll owe in the next 30 days next to everything you can actually turn into cash in that time.
Debtor days show how long customers take to pay; creditor days show how long you take. A gap between them is cash you fund yourself, and late business payers can owe you statutory interest. Your one action: if you invoice anyone, add a clear due date and payment terms to every invoice.
Cash conversion cycle = stock days + debtor days − creditor days: how long cash is stuck in the business. Long cycles plus fast growth can sink profitable firms. Your one action: for any business idea, write down how many days pass between paying for stuff and getting paid.
Unit economics asks whether ONE sale or ONE customer makes money: contribution, CAC, LTV and payback. If LTV is below CAC, growth makes losses bigger. Your one action: for any business you're curious about, estimate what one customer costs to win and what they bring in.
Runway = cash ÷ net monthly burn (spending minus income). Act long before it runs out: cut waste, forecast monthly, and start funding talks early. Your one action: work out your own personal runway: savings ÷ essential monthly costs.
Loans keep ownership but cost interest; grants are free but conditional; equity costs a share of your business. Real investors never charge an upfront fee to release money. Your one action: for any funding idea, write down what it really costs you: interest, conditions or ownership.
Limited companies' accounts are public at Companies House. Check net current assets, cash, debts due within a year, equity and whether the accounts are on time. Your one action: look up a small local company on Companies House and find its net current assets.
Small businesses are often valued as a multiple of earnings (EBITDA, or SDE for tiny owner-run firms); subtract net debt to get the equity value. Multiples depend on risk, size and growth. Your one action: practise once: pick a made-up EBITDA, a multiple and some debt, and work out the equity value.
Judge a business on honest numbers: real EBITDA, cash runway, unit economics, and what a valuation implies about the multiple. Hype and urgency are not analysis. Your one action: next time you see a startup pitch or headline valuation, work out the multiple and ask what the unit economics are.
Free with a codeBusiness Money Advanced: quick answers
Illustration: Kettle & Co has operating profit of £50,000, depreciation of £25,000 and amortisation of £5,000. What's its EBITDA?
£50,000 + £25,000 + £5,000 = £80,000. EBITDA is operating profit with depreciation and amortisation added back.
Why do people like looking at EBITDA when comparing businesses?
It compares trading before loans, tax and kit costs. That's the idea. Two cafés with different loans and tax bills can be compared on how the trading itself performs.
Related topics
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