What is EBITDA and why business owners should know about it?
12/7/10 at 4:32 PM by Tony Lael EBITDA is measure of your company’s ability to produce income on its operations during a given year. It is calculated as the company’s revenue less most of its expenses (such as overhead) but not subtracting its tax liability, interest paid on debt, amortization or depreciation. The basic calculation for EBITDA is as follows.
EBITDA is a key metric to help you understand the operating profitability of your business. If you are able to track EBITDA growth for each major line-of-business in comparison to revenue growth you are essentially measuring the operating profitability of each line-of-business.
EBITDA is used by banks, investors and merger & acquisition coaches to evaluate profit. By excluding expenses that were not created in the current time period, they can better compare to industry benchmarks and get a better understanding of operating performance.
Using EBITDA trend analysis can help you see more clearly how your individual lines of business are performing. If you know which lines-of-business are your power generators and which ones are going to be future drains, you will know with precision where to focus your team’s efforts.
EBITDA is one of several financial metrics you can track to see if you are heading in the right direction as a business, but the important part is for you to create a management process for your business that helps you zero in on your next top priorities to make improvements – this should be a continuous monthly process.
In fact, this month only (December 2010) we are providing any IT solution provider who signs up for Standard during the month of December a FREE Profitability Assessment Report – learn more about the details of this offer if you’d like.
Stay tuned to this blog as we provide additional business finance educational moments.