How to calculate EBITDA

Many organizations rely on EBITDA to gauge performance, but for many non-finance managers, this metric can feel like a puzzle with missing pieces. It's tough to be judged by something that seems so confusing!

So, what’s the deal with EBITDA? EBITDA stands for:

• Earnings
• Before
• Interest
• Tax
• Depreciation
• Amortization

In simpler terms, "earnings" equals net profit after tax—the final number on your income statement (P&L).

Why should you care about EBITDA? Let’s break it down! Knowing earnings before interest, tax, depreciation, and amortization can be super useful for a few reasons:

• Interest: How much interest the company pays is usually determined by management's choices about funding (think debt vs. equity). Since this doesn’t really reflect how the company is performing right now, we add it back into the EBITDA mix!
• Tax: Taxes are dictated by laws and can vary based on where you are. To keep things fair and square, we add back tax because it’s out of the company’s hands.
• Depreciation: Every year, fixed assets lose value as we depreciate them. This expense is based on past investments and doesn’t give insight into current performance, so we bring it back into the EBITDA equation!
• Amortization: Similar to depreciation, amortization applies to intangible goodies like patents and trademarks. Again, this expense comes from historical decisions, not current operations, so we add it back too.

How can non-finance managers boost EBITDA? You’ve got the power! Non-finance managers can improve EBITDA by raising sales prices, snagging cheaper inventory, and keeping an eye on costs like salaries, rent, and advertising.

In a nutshell, EBITDA clears away the clutter of things you can’t control, shining a spotlight on what you can influence. So, embrace it, and watch your impact grow!

Take a look at this short clip where I work through an EBITDA calculation:

Have a great day.

Best,

Mark

www.accountingmadeeasy.co

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