A company can post record EBITDA for three straight quarters and still miss a salary run. The gap between accounting profit and bank balance is one of the most common — and most preventable — causes of distress for growing Indian businesses. Here is the formula gap, the ratio that catches it early, and what to do when it widens.
EBITDA = Net Profit + Interest + Tax + Depreciation + Amortisation
OCF = Net Profit + D&A ± Change in Working Capital
Both start from net profit and add back depreciation & amortisation — a non-cash expense. That's where the similarity ends. EBITDA stops there: it is a measure of operating profitability assuming every rupee of revenue and expense on the P&L was also a rupee of cash. Operating Cash Flow (OCF) goes one step further and adjusts for the reality that revenue recognised is not always cash collected, and expenses incurred are not always cash paid.
The adjustment is the change in working capital — receivables, inventory and payables. If receivables grow by ₹5 Cr during the quarter, that ₹5 Cr of "revenue" sits in EBITDA but is subtracted out of OCF because the cash hasn't arrived yet.
| Line Item | Q1 (₹ Cr) | Q4 (₹ Cr) | What Happened |
|---|---|---|---|
| Revenue | 40 | 62 | Strong growth — sales team is delivering |
| EBITDA | 8.0 (20%) | 12.4 (20%) | Margin held steady — looks healthy |
| Increase in Receivables | (1.5) | (6.8) | Customers taking longer to pay as ticket sizes grow |
| Increase in Inventory | (0.8) | (3.2) | Stocking up to meet larger orders |
| Operating Cash Flow | 5.7 | 2.4 | OCF collapsed despite EBITDA growing 55% |
| OCF ÷ EBITDA | 71% | 19% | Cash conversion fell off a cliff |
On the P&L, this business looks like it's firing on all cylinders — revenue up 55%, EBITDA up 55%, margin flat. But the cash conversion ratio collapsed from 71% to 19% in three quarters. Almost the entire EBITDA gain in Q4 is sitting in unpaid customer invoices and unsold stock — not in the bank.
Cash Conversion Ratio = Operating Cash Flow ÷ EBITDA
| OCF ÷ EBITDA | Interpretation |
|---|---|
| > 90% | Excellent — typical of asset-light services and SaaS businesses |
| 70% – 90% | Healthy — normal range for most established businesses |
| 50% – 70% | Watch — acceptable during a growth phase, but track the trend |
| < 50% for 2+ quarters | Red flag — working capital is structurally absorbing cash |
| Negative | Critical — profitable on paper, burning cash operationally |
Track this ratio on a trailing 4-quarter basis, not a single quarter — seasonal businesses (festive-season retail, agri-linked manufacturing) will naturally see single-quarter dips that reverse. The danger sign is a multi-quarter downward trend with no reversal.
As a business grows and lands bigger customers, those customers often negotiate longer payment terms (60-90 days vs the 30 days smaller customers accepted). Revenue grows on the P&L immediately on invoicing; cash arrives 60-90 days later. If growth is fast enough, the "lag" compounds every quarter — see our Working Capital CFO Playbook for the Cash Conversion Cycle framework that quantifies this.
Manufacturers and distributors stock up ahead of an expected sales spike. The cash leaves immediately (to buy raw materials/stock); the corresponding revenue and EBITDA show up next quarter. In a high-growth phase, you are permanently "one quarter behind" on cash.
EBITDA explicitly excludes capital expenditure, interest, and loan principal repayments — by design, since it's meant to measure operating performance independent of financing and investment decisions. But the bank doesn't care about EBITDA; it cares whether you can make this month's loan instalment. A business can have EBITDA of ₹10 Cr, OCF of ₹6 Cr, and still face a cash crunch if capex + debt service for the quarter is ₹8 Cr.