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edmcouncil / fibo

The Financial Industry Business Ontology (FIBO) defines the sets of things that are of interest in financial business applications and the ways that those things can relate to one another. In this way, FIBO can give meaning to any data (e.g., spreadsheets, relational databases, XML documents) that describe the business of finance.
https://spec.edmcouncil.org/fibo/
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GitHub-1956 - Incorrect definition of EBITDA #1985

Closed ElisaKendall closed 6 months ago

ElisaKendall commented 6 months ago

Description

Modified the definition of EBITDA to better reflect its common interpretation per SME

Fixes: #1956

Checklist:

ElisaKendall commented 6 months ago

I think "measure of cash flow" is a bit vague. I suggest (helped by ChatGPT) "a financial metric that calculates a company's operational profitability by excluding non-operating expenses and non-cash charges."

The generally accepted accounting definition (GAAP does not have one, but I have an SME who knows), is that it is either a measure or estimate of cash flow, NOT a financial metric. And it is not always calculated the same way, and it is not considered usable for some reporting, such as to various government entities because it can be manipulated. The definition I've used is adapted from Barrons and Bruce's input.

jfgemski commented 6 months ago

Agreed

John

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From: Elisa Kendall @.> Sent: Wednesday, December 20, 2023 12:03 PM To: edmcouncil/fibo @.> Cc: John Gemski @.>; Review requested @.> Subject: Re: [edmcouncil/fibo] GitHub-1956 - Incorrect definition of EBITDA (PR #1985)

I think "measure of cash flow" is a bit vague. I suggest (helped by ChatGPT) "a financial metric that calculates a company's operational profitability by excluding non-operating expenses and non-cash charges."

The generally accepted accounting definition (GAAP does not have one, but I have an SME who knows), is that it is either a measure or estimate of cash flow, NOT a financial metric. And it is not always calculated the same way, and it is not considered usable for some reporting, such as to various government entities because it can be manipulated. The definition I've used is adapted from Barrons and Bruce's input.

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rivettp commented 6 months ago

I'm not fixated on measure vs metric, but I do think it's important to talk about a measure of profit as opposed to cashflow. You can earn a profit based on receivables (included in EBIDTA) but that does not mean you have the cash coming in!

"Cash flow, on the other hand, is a measure of the actual cash coming in and going out of the business. It reflects the company's ability to generate cash, which is crucial for meeting its short-term obligations and funding its operations. Unlike EBITDA, cash flow accounts for the actual timing of when revenues are received and expenses are paid. It includes changes in working capital and therefore is a direct indicator of a company's liquidity.

In essence, while EBITDA provides a view of a company's operational profitability by removing certain accounting and financial factors, cash flow directly measures the company's ability to generate and use cash. They serve different, but complementary, purposes in financial analysis."