EBITDA: Unlocking the True Cash Flow of Your Business

Understanding EBITDA

Are you looking to understand EBITDA and how it helps you evaluate the trading performance of your business? If so, you’re in the right place!

What is EBITDA and how it is used? 

EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. Basically, it’s a metric that helps you understand the cash generated from your operational trading. It is important to note that EBITDA is a proxy, not an actual cash flow.

Earnings, Interest, Tax, Depreciation, and Amortisation

Breaking it down, you start with your earnings, which is simply the profit after all your direct costs and overheads. Then, you subtract interest (any loans or funding), tax (corporation tax), depreciation, and amortisation.

Understanding Depreciation and Amortisation

Depreciation can be confusing. So, it’s important for you to understand that it’s a bookkeeping entry, used to spread the cost of fixed assets in your business over their useful life. e.g. if you buy a van for £20,000 with a life of four years, you would charge £20,000 divided by four to your Profit & Loss every year.

Amortisation is similar to depreciation, but it’s based on goodwill. e.g. if you buy a business for £1,000,000 and the assets are worth £800,000, the difference of £200,000 (which is the goodwill) would be amortised over the useful life, which could be 10 years.

The importance of EBITDA in evaluating business performance

EBITDA is a valuable metric for you and allows for easy comparison, helping you engage in discussions with potential buyers. But remember that it’s a bookkeeping entry rather than a pure cash flow entry.

How understanding EBITDA can benefit business owners.

In summary, EBITDA is a useful metric for you to understand the cash generated from your operational trading. It helps make comparisons and discussions with potential acquirers much easier. By understanding EBITDA, you will be in a better position of knowledge to evaluate the performance of your business.

So if you’re thinking of selling your business this is important – as is having all your financials in order and going the right way. Take our free diagnostic to get a scorecard of where you’re financials are strong and where they could be improved. Improving them might just mean you get the value you want for your business.