EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric that measures a company’s operating performance by excluding certain non-operating expenses. It provides an indication of a company’s profitability before accounting for interest, taxes, and non-cash expenses.
Page written by Ian Hawkins. Last reviewed on July 17, 2024. Next review due April 1, 2025.
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It might sound like another long-winded financial abbreviation, but EBITDA is actually a crucial acronym if you’re looking into financing a business and have equity funding on your radar. It stands for Earnings Before Interest, Tax, Depreciation, and Amortization. In simpler terms, it’s a detailed way to show your business’s profit. EBITDA helps you calculate your company’s overall earnings or net income before all the necessary evils are deducted. Confused? Don’t worry. We’re here to simplify everything you need to know about business finance.
To calculate EBITDA, follow these steps:
Determine the company’s net income: Obtain the net income figure from the company’s income statement. Net income is the total revenue minus all operating expenses, interest, and taxes.
Add back interest, taxes, depreciation, and amortization: Identify the interest expense, taxes, depreciation, and amortization from the company’s financial statements. Add these values back to the net income obtained in step 1.
Calculate EBITDA: Sum up the net income, interest, taxes, depreciation, and amortization figures to calculate the EBITDA.
The formula for calculating EBITDA is:
EBITDA = Net income + interest + taxes + depreciation + amortization
EBITDA is commonly used as a measure of a company’s cash flow and profitability, as it provides insight into its operating performance without considering non-operating factors. However, it’s important to note that EBITDA has limitations and should be used alongside other financial metrics and analysis when evaluating a company’s financial health.
It depends on your industry. Investors know this, and they’ll regularly compare a company’s EBITDA to the industry average or to similar businesses before deciding to invest. So it’s important to optimize your EBITDA if you can before going all-in on your funding search.
“If only I had a magic wand!” we hear you say. There’s no need, as there are a few simple steps you can take to improve your profitability and start accessing equity funding for your business.
Start by maintaining your prices because discounts just reduce your EBITDA. Then, think about where else you can cut costs. Could you cut down on travel or entertainment? Manage your inventories better? Start selling to new markets? Drop lines that are losing money?
Registering with Swoop gives you the opportunity to integrate your bank account and quickly and safely identify savings across banking, FX, broadband, and insurance. With average savings per SME being around $3,000, it can certainly make a positive impact on your EBITDA.
Whatever you do to boost your EBITDA will make your business more attractive to equity investors.
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