During my college course on accounting cash flow was by far the most difficult to understand and I still find it difficult in light of the cable company example.
As an owner you still want money to spend. How do you get that if not from the profits?
As an owner you still want money to spend. How do you get that if not from the profits?
It's a riskier model for non-cash flow based businesses though, in my opinion. If you don't have a stable source of cash flow from something like a subscription model it's harder to count on revenue being consistent (unless you're dominating a particular market).
Also can be risky if you only have one or a few clients providing the cash flow. If they pull out or go belly up, your business can be decimated with whatever overhead you added to provide for them.
In the cable company example, from taxes (not paid) and accelerated depreciation (a big part of the taxes not paid). Money is fungible and cash is the ultimately fungible form of money. Tax money (not paid) is better than money taken as taxed profits.
By running the business at a loss (from a profit/loss point of view), the cable company paid little or no taxes. You can take $100 in profit and pay $30 in taxes (net $70 in your pocket), or you can show $0 profit and roll that $130 into your business expecting $130 + growth in the future. Note that, with the cable company example, the cable company "was unprofitable" every year yet paid a compound return of 30% to its shareholders.
Or you sell some shares, or borrow against your equity. Perhaps you can roll it forward indefinitely and you're in a jurisdiction where your heirs get favorable tax treatment by inheriting the business.
The whole setup probably requires operating at a much larger scale than that of a sole trader or small family business.
I guess this why EBITDA is important: if you have positive EBITDA and stop growing the business, you can pay off your loans, finish depreciating your existing equipment, and with I=D=0 you have real profits.