Starting a Small Business

EBITDA: One Accounting Term All Business Owners Should Know

by
Sonu Shukla
on
2/18/2019
EBITDA: One Accounting Term All Business Owners Should Know

EBITDA, or Earnings Before Interest, Taxation, Depreciation and Amortization, is a frequently-used term that refers to a simple but invaluable accounting tool. Though EBITDA is not a formula that is accepted under GAAP, or Generally Accepted Accounting Principles, that omission belies its usefulness to those who are trying to provide an easy to understand, at-a-glance assessment of their business’ health and value, as well as to those who are trying to get a good idea of how a business measures up to others.

Because EBITDA does not adhere to GAAP, it is not a calculation that is routinely included on a business’ official financial statement. However, business owners who have put their company up for sale or who are seeking outside investments have found that it provides outsiders with a number that allows a quick and fair comparison of the business’ health and earnings potential, especially as compared to others.  

EBITDA’s value lies in the fact that once calculated it provides a snapshot of a business’ financial health and its potential for growth, without the complicating elements that can muddy the waters. The formula takes the business’ revenue figures and subtracts its expenses with the exception of those for depreciation, amortization, taxes, and interest – in other words, it is net income with the addition of those factors. To calculate a business’ EBITDA number, the business owner needs to begin with the following six figures:

  • Income
  • Expenses other than depreciation, amortization, tax, and interest
  • Interest
  • Taxes
  • Depreciation of operational assets such as equipment
  • Amortization of intangible assets, such as patents

A person or company considering investing in the business is able to use this information from multiple businesses in the same industry or business and compare them against one another. Though the information that is available on official financial statements may be more complete, different accounting techniques can make it hard to be sure that the comparisons are being made on a level playing field. EBIDTA has its drawbacks and is one of many methods that should be used for making important financial decisions, but for those looking for a quick and accurate way to get a solid feel for whether to consider a deeper dive, it eliminates uncertainty and provides solid information.

If you are an investor or buyer looking for professional guidance or assistance in interpreting financial information about a small business, contact a professional CPA for guidance.

Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].

share this post
Search for matches...
Sonu Shukla

Sonu Shukla

Sonu Shukla is a CPA, accountant, and tax preparer based in Orlando, FL. Sonu Shukla can assist you with your tax preparation and planning needs. Sonu is more than just another accountant in Orlando, Florida; he is a small business owner himself. It is a position in life that grants him the perspective and insight to emphasize with his clients, bringing them the best service possible. A Certified Public Accountant and a Certified Financial Planner, Sonu possesses the skills, education and experience to demonstrate unerring business acumen and passionately planned financial strategies. Being proactive is key for Sonu, tailoring highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out.

SONU SHUKLA, CPA, P.A.
23 reviews

Florida

Recommended Professionals

In the face of economic uncertainty, TaxBuzz is the industry's most up-to-date tax information.

Join 60,000 who get our weekly newsletter. No spam.

We know tax and accounting issues are complicated.

Do you have additional questions on this topic for this author?

Related Posts

Latest Posts