Why EBITDA is not the instalment

Start with the bridge

EBITDA can be a useful operating measure, but an equipment instalment leaves the bank account. A responsible review bridges earnings to cash after tax, maintenance capital needs, working-capital absorption, owner drawings and existing debt service.

For a growing distributor, rising receivables and inventory may consume the very cash that accounting profit appears to promise. For an agricultural contractor, an annual total can hide several months in which fixed instalments arrive before customer receipts.

Match the period to the business

Twelve-month averages flatten seasonal pressure. Compare monthly bank movement, management accounts and the operational calendar. Ask when the new equipment begins earning, whether ramp-up is immediate and who bears downtime during installation.

Treat adjustments as claims

An add-back should have evidence and economic sense. Once-off legal cost may not recur; a director’s personal expense may be discretionary; an unsupported “future saving” is neither. Record accepted and rejected adjustments separately so a committee can see how headroom was formed.

Stress the fragile assumption

A useful downside is specific. Test delayed utilisation, lower throughput, a weaker gross margin or a debtor paying later. The purpose is not to make every deal fail; it is to identify which assumption controls the result and whether structure can contain it.