Hi. Welcome back to Finance for Non-Finance Professionals. As we wrap up Week Three, we've been talking about cash creation and how to measure free cash flows in the firm by hunting through the financial statement and trying to back out from the accounting information, how much cash creation is going on. To put a practitioner's spin on that, we're back with our voice from the field, Christine Boyd. Welcome back, Christine. >> Hi. >> So, when you're out there, as an finance professional you see that difference between accounting statements and free cash flow. Can you give us your perspective on sort of the difference between those two metrics? >> Sure. Certainly, inside the firm counting metrics are the focus. >> Yes. >> This is what we report to the outside, this is what we report to Wall Street, this is what we're audited on. >> The earnings are. >> These are earnings. This are the earnings, but to everyone and certainly outside the firm, they want to understand what kind of cash is the firm creating, so. So we do have to take our accounting statement and try to get to a cash metric and to do that, we get to an EBITDA. >> Earnings before interest, taxes, depreciation and amortization, right? >> Yes, >> So inside the firm you have a lot of EBITDA focus. What is EBITDA, what is EBITDA growth? But you, at least at the CFO level, have a sense of both the accounting measures and the free cash flow? >> Absolutely, have to. >> Okay, that's interesting. >> Because our quarterly reporting and annual reporting, obviously, are all done in terms of accounting standards. You will never see EBITDA in an accounting report. >> Right, because these two sets of professions are answering two different questions. The accountants need to report on the financial condition of the company for regulatory purposes following generally accepted accounting principles. >> Exactly. >> Whereas, as an investor I want to know how much cash I'm getting. And so, that sort of drives a wedge between these two things, right? You have to report the accounting numbers, and we have to then build up our cash analysis as well. >> Right. >> Okay, so I guess in a sense what what pulls these two things together? There's no real problem with reporting accounting ratios order or accounting things like EBITDA, because in a sense, they're connected aren't they? >> They are definitely connected. >> Yes. >> There's like a rubber band that connects free cash flow with earnings. >> Right. >> Firms can't generate a whole lot of cash for a long time, but keep reporting negative earnings, right, something doesn't add up. And I can't pay out, and pay out, and pay out tons of dividends, but have no earnings to back it up. In a sense those two things have to be connected by a rubber band and get pulled back together right? >> Absolutely. Ultimately what firms care, at the end of the day the investor, the equity investor cares about getting a dividend. >> Correct. Yes a dividend is important. A dividend is also it can be tricky. Once a company incorporates a dividend, as you know, it will be expected. >> Quarter after quarter right. We'd never want to cut the dividend. >> That's interesting, isn't it? When you look at sort of how the market reacts to dividends, the market always appreciates dividend increases, but less so than dividend decreases where the market really punishes a firm for cutting or omitting their dividend. >> Definitely. >> And so firms tend to pay dividends out of what we call permanent earnings. Do you see that in practice? >> Absolutely, yes, absolutely. And we were in, in one of my firms, a fairly cyclical industry and so, we had this selected dividend that was fairly conservative to be sure that when we got to a downturn we didn't touch the dividend. And then- >> That's interesting. >> As it swung back up to high cycle, we could incorporate occasionally a special dividend. >> So that dividend get paid out of sort of the free cash flow, right >> [CROSSTALK] Right. >> You can't use earnings to pay dividends because dividends are actual cash checks that get cut out to investors, right? >> Right. >> And so focusing on dividends as a portion of your permanent earnings means focusing on the cash creation of the business. >> Absolutely. And ultimately that's what drives evaluations is whether or not investors are getting their money back. >> Right. >> Christine, thanks again for joining us. Next week, we're going to wrap up Finance for Non-Finance Professionals looking at the trade-off between risk and return, and what discount rate to put into for spreadsheet models.