Why focus on improving your company’s EBITDA?By Jeff Matthews
EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization
Most of us have heard this term, but its meaning and use are elusive.
EBITDA is used as a performance measurement by some firms and is often incorporated into loan covenants.
Businesses have different legal and financial structures. A C Corporation pays income taxes but an S Corporation and other pass-through entities are not subject to income taxes, with the firm’s earnings taxed to the shareholders. By looking at pre-tax earnings, the earnings of the entities are placed on equal footing.
How firms are financed can also distort comparisons. Some firms use owner’s capital to finance operations, others borrow, while others lease buildings and equipment. By looking at earnings before interest, depreciation and amortization the impact of borrowing and fixed asset depreciation is equalized.
Banks start with EBITDA and then substitute interest paid, taxes paid and capital spending. This adjusted EBITDA is compared to the loan and lease payments to estimate whether the business can repay its obligations.
It is a good practice for businesses to track and project their EBITDA. If the company has financial covenants embedded in its loan agreements, the covenants should also be measured regularly and projected.
Are there some things you can do to enhance your company’s EBITDA? Evolution Business Advisors supports small and mid-sized privately held firms who are in an evolutionary phase. If you are seeking financial guidance to help strengthen and further develop your organization, contact Jeff Matthews, Give us a call at 909-754-5401 or email us at info@EvolutionBusinessAdvisors.com.