Understanding EBITDA

Though it may seem obvious to the entrepreneur, the future is the key consideration when building any business.  What do we mean by this?  History has shown us that the most successful businesses are built with an eye on the future…future value that is.  So, the best way to construct a business is to build it as if it will eventually be sold.

Accordingly, business owners must continually assess and determine potential value using a method such as EBITDA (earnings before interest, taxes, depreciation and amortization).  Quite simply, because the profitability of a business must always be readily available, employing EBITDA (revenue – expenses [less depreciation and amortization]) accounting procedures can be invaluable.

EBITDA is an economic indicator that provides an easy understanding of a business’ cash flow and ability to pay back its debt.  In an ever-evolving and confusing environment of inflows and outflows, EBITDA quickly cuts through the complicated minutiae of accounting and provides solid baselines for both owners and investors.

Keep in mind that, while EBITDA is technically a non-GAAP figure because it doesn’t conform to “generally accepted accounting principles”, its flexibility (and thus its value) allows you to make adjustments you deem appropriate.  This can be helpful in getting to these “bottom-line” numbers that communicate the overall health and potential of a business.

Ultimately, because of its subjective nature, it is a good idea to seek outside opinions on calculations and formulas that determine critical factors such as the value of your company’s competitive advantage or brand as a whole.  If you are building a business with an eye to the future, EBITDA can help you see what is and what might be.