EBITDA and How We Use It to Measure Your Business Performance.
You’re running a good business. Things are going well but you want to understand more about your numbers and how your back end works so you can continue to grow your business.
You’re going to want to know your EBITDA.
What Does EBITDA Mean?
EBITDA is an acronym used to describe a process we use to analyse business performance.
E - Earnings
B - Before
I - Interest
T - Taxes
D - Depreciation
A - Amortisation (which is more or less the same as depreciation, but for non-tangible stuff).
Why Should I Care About My EBITDA?
Running a business requires a lot of hard work and effort. It can be hard to know how your business is performing and if your hard work is paying off.
Business owners ask us all the time - is my business doing well?
This question is hard to answer unless you are comparing apples with apples. EBITDA attempts to do just that, effectively acting as a comparison tool so you can compare your business to others.
EBITDA is also a powerful decision making tool. It is often used in forming business valuations and for testing debt serviceability.
For these reasons, investors (including yourself as the owner!) and bankers are particularly interested in EBITDA. Analysing your EBITDA over a period time will help;
you understand whether your actions are actually generating the profits you had planned for.
banks understand whether you will be able to generate enough profit to fund repayments - this may mean greater borrowing power or better rates - hello options!
investors (buyers, sellers, etc) are looking at your EBITDA as their return on investment… “if we buy this thing, what profit could we expect it to make? Is this the best place for me to invest my money? What other investment options are out there and what return do they offer?” Your EBITDA will impact how highly investors value your business and how much they would be willing to pay for it.
How Do I Calculate My EBITDA?
To calculate your EBITDA, you will need your profit and loss statement - you can get this from the financials your accountant prepared for you or from your accounting software. Check the date range the profit and loss covers - is it the date you want to calculate it for (i.e. the 2024 financial year, last quarter, etc)?
Go to the bottom of the page and get your “net profit after tax”. This is your starting point.
From here, add the following items to the net profit after tax amount:
Tax expense
Interest expense
Depreciation expense (and amortisation expense, if it applies)
Next you need to subtract the following amount from the above:
Interest income
And that’s how you calculate your EBITDA.
OK, so you know your EBITDA - now what?
Before you starting sharing it with the bank, investors etc make sure you get your accountant to double check it for you.
Together we can use this information to work out which of your decisions are enabling your success and which ones are detracting from it. Insights like this underpin informed decisions.
Informed decisions are powerful and allow you to formulate strategies that will directly impact your EBITDA and truly put you in control of your business.
We Partner With Business Owners, Building Businesses.
If you’re unsure of your EBITDA or perhaps you do know it but don’t what to do with it, talk to us! We’re here to help.
One of the biggest reasons we operate our business on a flat fee arrangement is that it allows us to help you make decisions for your business as they arise. You can rest easy knowing you can contact us with your questions instead of flying blind and hoping for the best.
An expert can transform your approach to finances and empower you to take control of your business’s financial health. Don’t let financial uncertainty hold you back from living out the dream you set out to when you started your business.
We’re passionate about empowering business owners to make confident & informed money decisions.
Ditch the chaos & start navigating your numbers with us now.
