In the financial management of many SMEs, EBITDA has become widely used as the main indicator of profitability. This figure makes it possible to analyse operating performance by excluding financial and accounting effects, making it easier to compare periods or companies. However, focusing exclusively on EBITDA can lead to misleading conclusions, especially when its impact on cash flow is not analysed.
A company can report positive EBITDA and still experience liquidity problems. This is because EBITDA does not reflect the investment required in working capital. Increasing sales means financing customers, increasing inventory or paying production costs upfront. These factors consume cash even when the business is profitable from an operational standpoint.
This phenomenon is common in growing companies. Revenue increases, margins remain healthy and the income statement improves. However, the company needs increasingly more resources to sustain that growth. The result is a frequent paradox: the business is performing well, but cash flow is under pressure.
The common mistake is to make decisions based solely on accounting profitability. Hiring staff, expanding facilities or taking on new projects without analysing the impact on cash flow can make the situation worse. The company expands its operations based on positive results that have not yet been converted into available cash.
Furthermore, the effect is amplified when payment collection periods are long. Industrial companies, construction firms and businesses providing complex services often finance their customers for several months. In these cases, EBITDA may show a profit while cash remains tied up. The company is generating earnings, but it has not yet collected the money.
From a strategic perspective, EBITDA remains a useful indicator, but it should be complemented by cash flow analysis. Combining the two makes it possible to understand whether growth is sustainable or requires additional financing. This combined assessment is essential to prevent unexpected cash flow pressures.
For an SME in this situation, the recommendation is to always analyse EBITDA trends alongside changes in working capital and cash flow. It is advisable to prepare monthly cash flow forecasts, identify the impact of growth on accounts receivable and inventory, and anticipate financing needs. Furthermore, structural decisions should be linked to actual liquidity capacity rather than operating results alone. This approach makes it possible to grow profitably without compromising financial stability and helps prevent situations in which an apparently profitable company experiences cash flow difficulties.
If your SME wants to identify and strengthen its competitive advantages over larger companies, request specialist advice, and the Galicia Economic Office will help you define the most suitable strategy for your business.
