If you run a small business in India—you may have come across finance terms like EBITDA or Free Cash Flow (FCF) in conversations, loan applications, or tax filings and felt a bit lost. Don’t worry. You’re not alone.
This guide explains the difference between Free Cash Flow and EBITDA.
With relatable examples and easy-to-understand explanations, you’ll learn what these terms mean, how they affect your daily decisions, and why understanding both can help you run your business smarter—without needing an accounting degree.
Key Takeaways
- Free Cash Flow shows how much real money a business has left after paying for all its expenses and investments.
- EBITDA tells you how much profit your business makes before paying taxes, interest, and other costs.
- Use Free Cash Flow to plan your spending, savings, or expansion, because it reflects actual cash available.
- Use EBITDA when comparing your business with others or applying for loans and investments.
- Free Cash Flow and EBITDA are not the same and serve different purposes in managing and understanding your business.
Understanding the Basics: What Are EBITDA and Free Cash Flow?
Let’s begin by unpacking what each term really means in your day-to-day business life.
What is EBITDA?
EBITDA, short for Earnings Before Interest, Taxes, Depreciation, and Amortization, is a way to measure how profitable your core business operations are, before considering expenses like loan repayments, taxes, and the aging of your equipment.
Think of EBITDA as looking at your shop’s monthly sales minus operating costs like salaries and rent—but ignoring anything related to bank loans, taxes, or equipment wear-and-tear.
What is Free Cash Flow (FCF)?
On the other hand, Free Cash Flow (FCF) tells you how much money is truly available to you after covering your essential expenses and big purchases, like buying a new laptop or renovating your store. It’s the cash you actually have in hand to use, save, or reinvest.
Let’s compare with an example: Home-Based Tuition Teacher in Nagpur
| Particulars | Amount (₹) | Explanation |
| Annual Earnings (Revenue) | ₹6,00,000 | Total income earned during the year. |
| Business Operating Expenses | ₹1,00,000 (example) | Internet, software, and other teaching costs (assumed here). |
| Net Income (After Expenses) | ₹5,00,000 | Revenue minus business expenses. |
| Capital Expenses (e.g., Projector, Desk) | ₹1,50,000 | Major purchases made this year. |
| Free Cash Flow (FCF) | ₹4,50,000 | ₹6,00,000 – ₹1,00,000 – ₹1,50,000 = actual usable cash. |
| Interest, Taxes, Depreciation | ₹60,000 | These are excluded in EBITDA calculation. |
| EBITDA | ₹5,60,000 | ₹5,00,000 Net Income + ₹60,000 (Interest, Taxes, Depreciation) |
- EBITDA highlights how your core business is performing, ignoring one-time or non-operational costs.
- Free Cash Flow (FCF) shows the actual cash in hand after all spending—including large purchases.
Why Do These Two Numbers Tell Different Stories?
Here’s where many Indian business owners get confused. EBITDA is often larger than Free Cash Flow because it excludes major costs like capital expenditures and taxes. It’s designed to help compare performance between businesses, even if they have different tax structures or loan burdens.
Free Cash Flow, in contrast, includes everything that drains your real cash reserves. If you bought a new tool for your design studio or spent on branding your cafe, that comes out of your Free Cash Flow.
In simple terms:
- EBITDA shows potential profitability.
- FCF shows real financial health.
When Should You Use EBITDA vs. Free Cash Flow?
Knowing when to rely on which metric can make or break your financial decisions.
Let’s say you’re an interior designer in Delhi. You’re planning to approach a bank for a small business loan. The lender will likely ask for your EBITDA to assess if your core operations generate enough earnings to support repayment. EBITDA ignores temporary costs and shows the true earning power of your business.
But now imagine you’re evaluating whether you can upgrade your design software or take a short break from work.
In this case, Free Cash Flow will be your best guide. It shows what you actually have in your bank account after paying staff, covering rent, buying materials, and upgrading your equipment.
Banks and investors love to see a strong EBITDA. But if your Free Cash Flow is weak, your business could struggle to stay afloat day-to-day.
How to Calculate EBITDA and Free Cash Flow (With Examples)
Let’s walk through how to calculate each, using simple numbers.
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
For example, a digital freelancer in Bengaluru earns ₹7 lakh (net profit). He paid ₹30,000 in interest on a loan, ₹40,000 in taxes, and ₹50,000 in depreciation on his equipment.
So, EBITDA = ₹7,00,000 + ₹30,000 + ₹40,000 + ₹50,000 = ₹8,20,000
This tells us his freelance business is quite efficient in generating operating profit.
Free Cash Flow = Operating Cash Flow – Capital Expenditures
Now let’s say a local bakery in Kochi made ₹10 lakh in operating cash this year. The owner invested ₹3 lakh into buying a new oven and refurbishing the kitchen.
Free Cash Flow = ₹10,00,000 – ₹3,00,000 = ₹7,00,000
That ₹7 lakh is what the owner can actually use—for savings, taking salary, or reinvesting in the business.
Which Metric to Use and When?
Understanding these metrics becomes truly helpful when applied to real decisions:
- Planning Expansion: Use Free Cash Flow. It helps determine how much money is available for growth after covering existing needs.
- Getting a Loan or Investment: Use EBITDA. It shows lenders and investors your ability to generate core profit.
- Comparing with Competitors: Use EBITDA. It filters out differences in taxes and financing costs.
- Checking Day-to-Day Sustainability: Use Free Cash Flow. It reflects what you can spend without hurting your business.
If you’re registered as an MSME in India, banks may require EBITDA margins for loan assessment. However, your loan repayment capacity truly depends on your Free Cash Flow.
Common Mistakes to Avoid When Understanding EBITDA and Free Cash Flow
Many business owners mix up these terms or rely too heavily on one. Here are pitfalls to watch for:
- Thinking EBITDA is Cash in Hand: EBITDA is not your bank balance. It’s a profit estimate before real-world deductions.
- Forgetting Capital Expenses: Buying assets like machines or computers should be subtracted when calculating Free Cash Flow.
- Ignoring Inventory or Customer Payments: A wholesaler in Chennai might report good earnings, but if ₹5 lakh is stuck in unsold stock, their actual Free Cash Flow may be dangerously low.
- Using EBITDA for Every Decision: Use EBITDA for external discussions. But when you’re planning your own salary or budgeting for lean seasons, rely on Free Cash Flow.
Track your capital expenditures (CapEx) and working capital changes monthly. Even a simple Excel sheet can give you insights into your Free Cash Flow.
Choosing the Right Metric for Your Business Journey
If you remember just one thing from this guide, let it be this:
EBITDA shows how well your business is running. Free Cash Flow shows how strong your business really is.
For most small businesses in India—whether you’re a fashion designer or a wellness coach—Free Cash Flow is the practical tool for everyday financial clarity. It shows you:
- Can you afford that new laptop?
- Will you have enough to pay next month’s rent?
- Can you take a few weeks off without worry?
Meanwhile, keep EBITDA in your back pocket for when you want to show others (like banks or investors) how well your business performs.
Use simple accounting software to regularly update your cash inflows, outflows, capital spending, and loan repayments. This small habit can protect you from major financial blind spots.
Conclusion
Learning to read your business’s numbers is not just about better accounting—it’s about gaining control. When you know what EBITDA and Free Cash Flow mean and how to use them, you’ll make better choices, avoid cash crunches, and grow more confidently.
Whether you’re just starting out or growing fast, remember:
- EBITDA tells a story about your business performance.
- Free Cash Flow tells the truth about your financial strength.
Use both wisely, and you’ll never be in the dark about your business again.
Frequently Asked Questions (FAQs) on Free Cash Flow and EBITDA
This FAQ section explains these concepts in simple language using real-life examples to help you make better financial decisions.
What is the difference between Free Cash Flow and EBITDA?
Free Cash Flow is the money your business has left after paying for everyday operations and major expenses like equipment or tools.
EBITDA shows how much profit your business earns before paying for interest on loans, taxes, or the decline in value of assets like computers or machinery.
For example, if a mobile repair shop earns ₹10 lakh in a year but spends ₹3 lakh on new tools, its Free Cash Flow is ₹7 lakh. EBITDA would not subtract the tool cost, so it may show a higher number.
Why is Free Cash Flow important for small businesses in India?
Free Cash Flow tells you how much cash is actually available to run or grow your business after covering all costs. This helps with decisions like hiring staff, upgrading equipment, or handling slow sales months.
For example, a tuition teacher in Pune who earns ₹6 lakh but spends ₹1.5 lakh on a projector and furniture will have ₹4.5 lakh in Free Cash Flow. That’s the money she can use for personal savings, expansion, or emergencies.
When should I use EBITDA instead of Free Cash Flow?
Use EBITDA when you want to measure how well your business is performing before costs like taxes and interest are applied. It’s often used by banks, investors, or when comparing your business to others.
For instance, a digital agency in Bengaluru applying for funding might highlight its EBITDA of ₹12 lakh to show operational strength, even if its Free Cash Flow is lower due to one-time investments.
Can Free Cash Flow be negative? What does that mean?
Yes, Free Cash Flow can be negative if your business spends more cash than it earns in a period. This might happen if you invest in new equipment or if customers delay payments.
For example, a sweet shop in Ahmedabad might earn ₹5 lakh but spend ₹6 lakh on a shop renovation and stock. This results in negative Free Cash Flow, which means you may need extra funding or loans to cover your expenses.
How can I calculate Free Cash Flow and EBITDA easily?
To calculate Free Cash Flow, subtract capital expenses (like machines, tools) from your operating cash flow (money earned from business activities).
To calculate EBITDA, add interest, taxes, depreciation, and amortization to your net profit.
For example, a mechanic in Delhi earning ₹8 lakh, with ₹1 lakh in equipment purchase and ₹50,000 in taxes, will calculate his FCF as ₹6.5 lakh and EBITDA by adding back taxes and depreciation to net income.
