As your small business grows, it’s important to keep track of its revenue generation and the factors that may impact its profitability. Calculating your business’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) can help you figure out how much money your business brings in from its core operations and empower you to make informed financing and accounting decisions. Investors also look at EBITDA to determine how profitable a company is.
How to Calculate EBITDA
EBITDA draws on multiple pieces of information:
- Net income
- Interest expense
- Depreciation: This is when a tangible asset’s value, such as equipment and commercial real estate, reduces over time.
- Amortization: This is when an intangible asset’s value, such as a patent, copyright, or trademark, reduces over time.
Some of these terms, like taxes and interest, are easier to understand. Others, like depreciation and amortization, are less straightforward because they represent value — how much assets that are used over time are worth. While businesses are still using these assets, they can be expensed as a tax deduction. Depreciation and amortization determine how much businesses can deduct for their assets each year.
To calculate EBITDA, start with your business’s revenue and then subtract the cost of goods sold. Once you have that amount, subtract operating expenses, such as salaries and rent. Expenses for interest, taxes, and depreciation aren’t considered in EBITDA, hence the “before”, but when you do subtract them, what you’re left with is your net income.
Calculating your business’s EBITDA can help you gain a better understanding of its financial health. By keeping track of its earnings, you can set your small business up for a more profitable future.
The information for this blog was provided by Nicolas Boucher, Founder of AI Finance Club. For more information, visit https://nicolasboucher.online.