Business Finance: EBITDA

How adequate is your record keeping? These helps and forms the basis for making financial comparisons for companies and potential investors. Earnings before interest and tax (EBIT) is used for comparisms and also for negotiation. It gives a thorough analysis of how the business is faring.

Earning before Interest, Tax, Depreciation and Appreciation (EBITDA) are financial indicators used in comparisons of 2 or 3 companies in terms of earnings and turn over. EBITDA determines where your business position is financially and it’s used to check the operational performance of companies.

Always check the company’s profit before and after tax to arrive at a ratio that will help determine the earnings. The higher the EBITDA ratio generated, the better the performance of the company. Basic elements in EBIT and EBITDA include: Operational income, Depreciation, Amortization, Interest Charge, Taxes (monies due to govt) etc. In analyzing a company properly you need a very good accounting system. It’s advised that you adopt an accounting system that is robust, that will assist to generate & collate data in the important areas.

Key financial statements needed in business include: Balance Sheet (Assets and liabilities and capital base, etc); Income Statement (comparing revenue, expenditure); Cash Flow (how you generated fund). Other vital things to note & do regarding your accounting system are: Collate your financial data on daily or weekly basis and analyze. You don’t have to do the analysis yourself, you can get an expert (accountant) but always have a good grip of your financials. Always check the average turnover per staff to be sure you are not over or under staffed.

Capturing Operational Costs/Expenses is important. Have a financial/accounting policy to help your company understand the use of its assets and replacement life-cycle. As a business person you must also understand how to interpret financial statements and be aware of your earnings per share as a business owner. Before venturing into any business try to understand the associated risks and what risk premium is associated with the sector you operate in.

Also be clear on where you want to focus on within the pyramid, You can either focus on commodities at the bottom of the pyramid or luxury goods at the top of the pyramid. You must also understand how to attract capital. Attracting capital entails a series of gradual step, so take little amounts before taking big amounts, taking more capital than is needed can kill your business, you will begin to consider frivolous spending.

Frequent Questions and Answers on this topic include:

What is the adequate capital needed to sustain your business?
At least accrue for 6 months expenses for your business.

Is debt good for my business?
If and when you take debts, always make sure it’s project based. That way, you can be sure of what it’s used for.

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