EBITDA Unpacked: Understanding This Important Financial Performance Indicator
To keep a close eye on the financial health of your small business in Missouri, it is wise to pay attention to a number of performance indicators. One highly important measurement to watch is known as EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. This figure can help you better understand the long term earnings potential of your small business. You must know how to calculate and use the EBITDA, plus avoid its potential pitfalls, to benefit from direct access to this important information.
Understanding the figures used to calculate EBITDA reports can help you utilize these metrics to ensure the success of your small business.
Earnings: Total net income
Interest: Interest payments made on loans and lines of credit
Taxes: Tax liabilities on business profits
Depreciation: Wear and tear on tangible assets, like equipment and vehicles
Amortization: Costs relating to intangible assets, such as loan payments and patent licenses
To calculate EBITDA figures, interest, taxes, depreciation and amortization are added back to the net income generated by your company during the specified period.
When used properly, EBITDA shows your company’s ability to turn a profit. This method of calculating financial performance provides a full picture by taking assets into consideration while removing financing and accounting variables from the equation. This figure allows investors and lenders to quickly and accurately evaluate your company’s potential for success by leveling the playing field between different business sizes and structures.
Since it is possible to skew the results in your favor by selecting flattering metrics for your EBITDA calculations, there is a potential for misuse that decreases the utility of this metric. If you do not use the same figures each time you run these calculations, your metrics may not be able to accurately reflect your company’s true earnings potential.
In addition, you must be wary while utilizing your EBITDA figures to make business decisions, as the results do not cover working capital or equipment replacement costs. Furthermore, the figures only represent profits, not actual cash flow, which only accrues as your invoices are actually paid. To balance your EBITDA results, look over your other financial performance metrics on income statements, balance sheets and statement of cash flows.
Achieving Your Financial Goals
Ensure you always have accurate EBITDA numbers on hand by enlisting the help of the accounting professionals at accountRely in St. Louis, MO. Your accounting professionals will utilize standardized methods to create highly accurate financial reports for your small business. You can use the combined reports to help ensure your company’s continued performance and growth throughout the years.