EBITDA is an effective measure of your business’s core profit trends. It eliminates extraneous factors, giving you a more accurate comparison of your business’s financial growth. As a result, any steps you take to improve EBITDA strengthen your business.
Unfortunately, most businesses have their EBITDA adversely affected by overbilling and incorrect fees from utility and service companies. EBITDA matters to your business’s bottom line and also to your investors.
In this guide, we look at everything about EBITDA, including what it is, why it matters, and how you can improve EBITDA at your location.
What Is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization — or EBITDA — is a non-GAAP metric used to measure the financial performance of a company. It is an alternative to measuring net income in some cases. EBITDA excludes expenses associated with debt by adding back taxes and interest expenses.
While it can be misleading at times because it eliminates the cost of capital investment like property, it is a more precise measure of corporate performance because it shows earnings before the influence of accounting and other financial decisions.
Why Does EBITDA Matter?
EBITDA has numerous functions in the business industry. It compares companies against each other and against industry averages. It can also be used to estimate the cash flow available to pay the debt of long-term assets. Other uses of EBITDA include:
- Measuring the core profit trends of companies
- Valuating a company for businesses, banks, and investors for the purpose of credit facilities or investing
- Determining the debt service coverage ratio (DSCR) for business loans
Tips to Improve EBITDA at Your Business Location
Whether you’re preparing for a business takeover, considering new investors, or simply looking to make your business more appealing to creditors, it starts with a plan to improve EBITDA. Here are a few tips on how you can achieve this.
1. Focus on Cost Reduction
Cost reduction is the best place to start. You won’t need to make any massive changes. It’s quick and effective, and the results are almost immediate. Cut down on expenses and make more frugal decisions about where you can trim the fat in your business.
It might also be time to consider an internal audit to help identify and correct any utility and service bills you could be overpaying for. While the auditing service could cost you in the short term, the amount of money you could save could help you rapidly increase your base points in a short time.
Cost reduction can take many forms, depending on your business’s priorities. Some common places to focus on when cutting running costs include:
- Restructure the management of the business.
- Eliminate unessential expenditures.
- Reduce personnel costs.
- Reduce the production cost per unit or product. However, be cautious not to impact the quality of the product or service.
Util Auditors offers a full range of internal auditing services. We have a proven track record of helping companies identify and streamline their expenses, including identifying service contract billing errors and introducing industry-leading systems and technology that can help your business run more efficiently and on a leaner budget.
2. Maintain Stability
Maintaining your pricing could be easier said than done in a highly volatile business environment. But it offers lots of benefits. Discounting can have a massive effect on your EBITDA reduction. The most convenient and easiest technique that your business can pursue to maintain price stability is to focus on other factors to decrease the cost of production while increasing earnings.
3. Increase Your Revenue
Increasing revenue can drastically improve EBITDA for your business. Although it’s not easy, there are many strategies you can use to boost revenue, depending on your business niche. Some common ways to increase revenue include:
- Selling existing products to new customers
- Developing new products for existing customers
- Expanding your sales locations
- Introducing your products to a new market
4. Cut Back on Outsourcing
Improving your EBITDA might also mean rolling up your sleeves more by distributing work more efficiently within the business and reducing the use of sub-contractors. This approach allows you to maximize your people’s time to generate income through billed hours.
This approach requires drastic changes to project management. You need to have an instant and timely evaluation of the portion of work delivered by contractors and employees at any point in time. The goal is to:
- Increase utilization rates
- Increase revenue
- Enhance gross margins
- Make net profits higher
Automate repetitive manual processes that don’t add value to your business. Automating will easily reduce human resource costs, increase revenue, raise employee productivity, and maximize billable utilization while improving data accuracy.
How you automate — and the business areas you can automate — depends on your niche and type of business. Nonetheless, making small automation changes will drastically reduce the time people spend on non-billable administration and minimize leakage of billable time.
6. Improve Inventory Management
Inventory management is pivotal to improving your business’s EBITDA but is often left out. A poorly managed inventory negatively affects your working capital and, consequently, your EBITDA.
Poor inventory management means your business has incurred costs to produce or deliver services for which you haven’t received any revenue. The business loses money two-fold: first by not getting revenue and then by acquiring the production cost.
You should balance selling and production for a healthier EBITDA, focusing on better inventory management.
Why Is Improving Your EBITDA Important?
Why should you go through all this trouble to improve your EBITDA? Is it even that important? Yes, it is. EBITDA growth is a crucial parameter in studying the fundamentals of your business or company. It is commonly used to measure the company’s ability to optimize the expenses to sales ratio.
Improving your EBITDA is important for many reasons, including:
It Helps You Understand How Profitable a Company Is
Whether it’s yourself or financial professionals looking to purchase your business, EBITDA is one of the most effective metrics in determining the profitability of a business. You can also use EBITDA to help in the valuation of a prospective investment, especially in the retail industry.
It Gives a View of the Company’s Value
You can also use EBITDA to give an idea of the company’s value and even demonstrate its worth to stakeholders and prospective investors.
When applying for a loan for your business, banks will also turn to EBITDA to determine the health of the business and its ability to pay back loans.
You Can Predict the Future of the Company
EBITDA also factors in determining the future of your business and projects what the future profits will look like. This is essential not only for you but also for potential investors.
The Bottom Line on How to Improve EBITDA
There’s no doubt you should give your EBITDA growth some serious attention. Whether it’s for the growth of your business, seeking investors, or considering a bank loan, your EBITDA will have a tremendous effect on how people view your business from a financial perspective.
It’s critical to make the necessary changes to help your business become more profitable. An internal audit is an excellent place to start, especially when your goal is cost reduction. When you have an internal audit, you can quickly and effectively determine problem areas where you can cut back without affecting your team or the efficiency of your business.
Contact us for more information on internal auditing on how we can help increase your EBITDA by reducing wasteful spending, including overpayment of service contracts and utility bills that could help you get a refund.