The following is a quote from a breakfast that I recently had with a long-time senior executive and UHNW private direct-deal investor.
“We all know that the D and A in EBITDA can be ‘delusional accounting’ but it is ‘accepted’ so we work it.”
We were discussing how most everyone inside the business knows about the games that are all too often played with EBITDA, and other valuation and reporting metrics, but how they are now accepted by investors large and small so…
It made me think of a poem that was written in 1975, which is in the title of this post and is listed below. An old banker gave it to me when I first got into the business in the late 80s.
We all know that some in the industry have this job:
“As long as the music is playing, you’ve got to get up and dance.”Chuck Prince, CEO of Citigroup – 2007
Considering that the industry is generally playing with other people’s money, however, should the following old rhythmic verse by played over and over again?
Watch Cash Flow
Once upon a midnight dreary as I pondered weak and weary
Over many a quaint and curious volume of accounting lore,
Seeking gimmicks (without scruple) to squeeze through
Some new tax loophole,
Suddenly I heard a knock upon my door,
Only this, and nothing more.
Then I felt a queasy tingling and I heard the cash a-jingling
As a fearsome banker entered whom I’d often seen before.
His face was money-green and in his eyes there could be seen
Dollar-signs that seemed to glitter as he reckoned up the score.
“Cash flow,” the banker said, and nothing more.
I had always thought it fine to show a jet black bottom line.
But the banker sounded a resounding, “No.”
Your receivables are high, mounting upward toward the sky;
Write-offs loom. What matters is cash flow.”
He repeated, “Watch cash flow.”
Then I tried to tell the story of our lovely inventory
Which, though large, is full of most delightful stuff.
But the banker saw its growth, and with a might oath
He waved his arms and shouted, “Stop! Enough!
Pay the interest, and don’t give me any guff!”
Next I looked for non-cash items which could add ad infinitum
To replace the ever-outward flow of cash,
But to keep my statement black I’d held depreciation back,
And my banker said that I’d done something rash.
He quivered, and his teeth began to gnash.
When I asked him for a loan, he responded, with a groan,
That the interest rate would be just prime plus eight,
And to guarantee my purity he’d insist on some security—
All my assets plus the scalp upon my pate.
Only this, a standard rate.
Though my bottom line is black, I am flat upon my back,
My cash flows out and customers pay slow.
The growth of my receivables is almost unbelievable:
The result is certain—unremitting woe!
And I hear the banker utter an ominous low mutter,
“Watch cash flow.”
– Herbert S. Bailey, Jr. – 1975
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