Definition: Financial statements that are adjusted by adding back discretionary (non-essential to operations) expenses to net pretax operating profit to estimate a company's economic cash flow , versus cash flow produced for tax purposes.

Example: An example of an unusual item that would be adjusted includes expenses related to a natural disaster or income from an insurance settlement that is not in the ordinary course of business.

See Also: Adjustment, SDE.

Tips: Most business owners manage their small businesses with the goal of minimizing taxable income by deducting expenses that are not directly related to the business’s operations. For this reason, it is often necessary to adjust the financial statements by “adding back” these expenses in order to show potential owners the actual cash flow available. Adjusting the financials allows one to compare a business with other businesses using seller’s discretionary earnings (SDE) or EBITDA .