Thursday 06/27/2019

What is EBITDA and Why is it Important?

Tom Krause, CPA is a Founding Director at Corrigan Krause.

Have you ever considered selling your business? Do you anticipate selling in the future? If yes, it’s important that you familiarize yourself with EBITDA and how it could affect the future sale of your business.

What is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, and measures a company’s operating performance.  In the past, investors have typically focused on cash flow, net income, and revenues as their main source of performance measurement.  EBITDA has become a more common measurement of profitability because it reflects operational cash flow for a business by excluding non-operating factors, such as internal expenses and taxes.

There is no legal requirement for a company to disclose its EBITDA, but many companies often do.  EBITDA is calculated by beginning with your earnings before tax and interest and then adding back depreciation and amortization.

EBITDA = operating income + depreciation and amortization​

Some argue that EBITDA gives a more realistic view of operations due to the fact that it is removing specific expenses that can skew results of how the company is truly performing.

History of EBITDA

EBITDA was developed in the 1980s as a way for investors to decide whether or not a company would be able to take care of servicing debt in the upcoming years.  Occasionally, this measurement would be used on a company that is in distress and in need of financial reconstruction. The use of EBITDA has since spread and become a common measurement in a wide range of businesses and uses.

EBITDA is important because, generally speaking, as EBITDA grows, so does the value of a business. Though EBITDA is not the only value measurement, it is important and universal.

How to Increase EBITDA

  • Work on increasing revenue
  • Improve cost of sales
  • Improve operating expenses
  • Diversify your customers
  • Diversify your products
  • Improve your management team
  • Improve cash flows
  • Recruit and retain the best staff
  • Understand your competition

If you have any additional questions about EBITDA or how to increase EBITDA, please reach out to Tom.

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