A company reports £500,000 of EBITDA, yet its cash balance falls during the year. For an investment banking analyst, the useful question is where the cash went. Customer credit, inventory, capital expenditure, interest and financing decisions can explain the difference, but the model needs to show the bridge clearly.
EBITDA measures earnings before interest, tax, depreciation and amortisation. It excludes several cash costs and does not capture the timing difference between recording a transaction and receiving or paying cash. A worked EBITDA-to-cash-flow reconciliation helps an analyst explain those movements, check historical model inputs and assess whether a forecast is credible.
Define which cash flow you mean
The phrase cash flow can refer to operating cash generation, free cash flow or the change in the bank balance. These are different measures. Name the subtotal being calculated before building the bridge, and apply the same definition when comparing companies or periods.
The example below uses an analytical bridge from reported EBITDA to operating cash after cash interest and tax, then deducts capital expenditure, and finally includes financing and shareholder distributions. It is a management analysis, not a prescribed statutory cash-flow statement format.
The IFRS Foundation’s overview of IAS 7 explains the operating, investing and financing categories used in a statement of cash flows. When tying a model to published accounts, follow the reporting framework and accounting policies applicable to those accounts rather than assuming that every company presents interest and other items in the same place.
Set up the example
Consider Harbour Components, a fictional distributor. All figures below are in £000 for one financial year. Revenue is 3,000, operating profit is 420 and depreciation and amortisation are 80, giving reported EBITDA of 500.
For clarity, assume there are no acquisitions, disposals, foreign exchange effects, leases, non-cash charges beyond depreciation and amortisation, or other operating balance movements. Cash interest and tax are shown separately. Actual company reconciliations often require additional lines.
| Earnings measure | £000 |
| Operating profit | 420 |
| Add depreciation and amortisation | 80 |
| Reported EBITDA | 500 |
This starting EBITDA is unadjusted. If management supplies adjusted EBITDA instead, first reconcile it back to the accounts. Costs described as one-off may still have consumed cash, and forecast savings may not have been achieved. Neither can disappear from a historical cash reconciliation simply because they were excluded from an adjusted earnings measure.
Calculate the movement in operating working capital
Harbour has invested more cash in receivables and stock, partly funded by suppliers. The relevant balances are shown below. Cash, borrowing, and interest and tax balances are excluded from this simplified operating working-capital schedule because they are handled elsewhere in the bridge.
| Operating balance | Opening £000 | Closing £000 | Cash effect £000 |
| Trade receivables | 300 | 420 | (120) |
| Inventory | 200 | 280 | (80) |
| Trade payables | 180 | 230 | 50 |
| Net operating working capital | 320 | 470 | (150) |
An increase in receivables means revenue has exceeded collections, all else equal. An increase in inventory means more cash is tied up in stock. An increase in trade payables means some operating costs or stock purchases remain unpaid, preserving cash for the period.
The business has therefore absorbed 150 in working capital: 120 plus 80 less 50. Deduct that amount from EBITDA to arrive at 350 of operating cash before interest and tax under the stated assumptions.
In a real model, also consider accruals, prepayments, deferred revenue and other relevant balances. Remove movements caused by acquisitions, currency translation, reclassifications or non-cash transactions before treating balance-sheet changes as cash effects. A simple opening-to-closing subtraction is only reliable when those complications have been addressed.
Build the complete cash bridge
Harbour paid 40 of cash interest, 60 of tax and 300 for capital expenditure. It borrowed an additional 100, repaid 80 of principal and paid dividends of 20. Opening cash was 150.
| Reconciliation | £000 |
| Reported EBITDA | 500 |
| Increase in trade receivables | (120) |
| Increase in inventory | (80) |
| Increase in trade payables | 50 |
| Operating cash before interest and tax | 350 |
| Cash interest paid | (40) |
| Cash tax paid | (60) |
| Operating cash after interest and tax | 250 |
| Capital expenditure paid | (300) |
| Cash after capex and before financing or distributions | (50) |
| New borrowing | 100 |
| Loan principal repaid | (80) |
| Dividends paid | (20) |
| Net change in cash | (50) |
| Opening cash | 150 |
| Closing cash | 100 |
The company generated positive operating cash after interest and tax, but capital expenditure exceeded that cash generation by 50. New borrowing, repayments and dividends netted to zero. The closing cash balance therefore fell from 150 to 100 despite EBITDA of 500.
For this example, cash after capex and before financing or distributions is a levered free-cash-flow measure because cash interest has already been deducted. State that definition beside the calculation. Do not transfer it unchanged into a DCF requiring unlevered free cash flow, where operating tax and the treatment of financing need to be consistent with the valuation method.
Connect the spreadsheet to the source documents
The reconciliation needs evidence behind each line. Tie operating profit and depreciation to the accounts, working-capital movements to the relevant ledgers, and borrowing movements to debt schedules. Use bank records to support actual cash payments and the opening and closing cash positions.
If those records arrive as PDFs, Accounts Draft’s bank statement conversion tool can extract the transactions into Excel for review. An analyst can then identify interest payments, debt movements and larger capital payments, keeping a reference to the original statement for each material item.
Check the export against statement totals and investigate unmatched transactions. A payment description alone may not tell you whether spending is inventory, an expense or a fixed asset; invoices and ledger entries provide that context. Equally, a bank statement cannot reveal unpaid invoices or all non-cash adjustments, so it supports the reconciliation without replacing the accounting records.
Read the commercial explanation behind the bridge
Harbour’s increase in receivables deserves a closer look. Compare collection days, ageing and subsequent receipts with the prior year. If revenue grew rapidly, part of the increase may be expected. If sales were flat but overdue invoices rose, the model may be overstating the reliability of future collections.
Apply the same reasoning to inventory and payables. Stock growth might prepare the business for a new contract, or reflect slow-moving products. A rise in payables may be agreed supplier funding, or evidence that the company is delaying payments to preserve liquidity.
Split the 300 of capital expenditure between replacement needs and growth projects using supporting evidence. The full amount belongs in the historical cash bridge, whatever its purpose. For forecasting, the distinction helps assess which spending can realistically be deferred and what is required to maintain trading capacity.
Recreate the example in Excel
Use separate sections for the earnings inputs, opening and closing operating balances, cash interest and tax, investing cash flows, and financing movements. Enter source references beside the inputs and calculate subtotals with formulas. Preserve a consistent convention: inflows are positive and outflows negative.
The final check is calculated closing cash less the independently verified closing cash balance. It should equal zero. Leave any difference visible and investigate it; a balancing adjustment conceals an error instead of explaining it.
As a sensitivity exercise, assume closing receivables are 470 rather than 420, with every other assumption unchanged. The extra 50 absorbed in receivables reduces operating cash after interest and tax to 200, cash after capex to negative 100 and closing cash to 50. EBITDA remains 500.
That is the distinction an analyst needs to communicate. EBITDA describes a level of earnings, while the cash bridge shows the timing and spending requirements that determine liquidity. A credible model makes both visible and explains the relationship between them.