What’s your EBITDA?
When I give speeches I like to wrap up the presentation by doing a group exercise where the participants have to look at a simple set of financial statements and calculate a Company’s EBITDA (earnings before taxes depreciation and amortization). This is the most commonly used financial short hand for understanding the operating cash flows a company generates.
What’s interesting is many business owners and CEOs have a tough time calculating EBITDA. Many go back through their the notes from my presentation to look up the formula. What this tells me is many owners and CEOs of private companies don’t routinely look at their EBITDA often in their own business. The problem is EBITDA is typically the most important component to calculating a company’s enterprise because that value is based on a multiple of EBITDA (i.e. 5 times EBITDA or something similar). Conversely, financial owners of businesses (private equity firms or larger corporate owners) watch EBITDA like a hawk, because it most determines value.
If you are one of those owners, don’t freak out. Just start to look at it and incorporate it into your business and corporate financial planning process. Here are three ways to do it.
1) Calculate EBITDA the last three years…manually. Start with net income then add back the interest, taxes and deprecation and amortization. Doing it manually will cause you to internalize what goes into the number.
2) Add EBITDA to all your internal financial reports, budgets and forecasts. EBITDA isn’t something that naturally pops out on accounting statements. If you already summarize financials into a different format for key management or owners, then add the EBITDA calculation.
3) Identify ways to significantly increase EBITDA. Focusing on growing revenue and EBITDA does not always lead to the same objective. Companies that incorporate both often exponentially increase their value over time.
The more frequently you look at EBITDA, the more likely you are start identifying ways to drive the results you want.