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Guide

How's Your EBITDA?

Increase the value and cash flow of your business, while avoiding common pitfalls. Cadence Bank gives guidance to improve your EBITDA.

It’s one of those financial terms that causes some non-financial types to furrow their brows when they hear it and say, “Huh? What is ebitda?” We’re talking about EBITDA, an acronym that stands for Earnings Before Interest, Taxes, Depreciation and Amortization. 
 
The EBITDA formula determines how profitable your business is. It’s computed by adding interest, taxes, depreciation and amortization expenses to net income. Essentially, EBITDA tells you how much money your business made when factoring in only the expenses necessary to run the company on a day-to-day basis.
 

EBITDA and Cash Flow

One of your primary financial goals as a business owner or executive should be to increase EBITDA. Doing so will not only make your business more profitable, but it will boost your cash flow
 
“EBITDA is also one of the main things your bank will look at when analyzing your income statement as part of a loan request,” adds Maurice Champion, Executive Vice President and Executive Group Manager of Business Banking.
 
In addition, EBITDA will play a large role in the valuation of your business. “EBITDA is an important consideration to potential buyers who are evaluating your business for purchase,” says Champion. Ideally, you should be able to demonstrate a one- to three-year performance history of increasing sales and EBITDA in order to maximize your sale price.
 
However, increasing EBITDA can be a balancing act — because actions that you take to increase earnings can backfire and jeopardize your company’s growth. Therefore, one of your goals should be to grow EBITDA by lowering expenses in areas that won’t hinder sales growth. When implemented successfully, such strategies may enable you to increase EBITDA even if your sales are flat.
 

What Hinders EBITDA?

First, let’s take a look at some of the factors that can lead to EBITDA underperformance. These often include the following:

 
  • Ineffective marketing — You should be able to gauge the return on investment of each marketing dollar you spend. This will enable you to allocate your marketing dollars more efficiently and eliminate wasteful spending, which can boost EBITDA.
  • Misaligned product management strategies — It’s not uncommon for strategic breakdowns to occur between the executive and lower levels of the company when it comes to product management. It’s important to take a step back and make sure your investments in product development align with the overall corporate strategy.
  • Excessive sales commissions — Your commission structure should be re-examined periodically to make sure it’s still in line with your sales goals and overall revenue. If commissions are growing faster than revenue, do some investigating to find out why.
  • Ineffective use of sales channels — Are you maximizing all the potential channels that can be used to sell your products? Face-to-face selling might be necessary if you sell expensive, big-ticket items — but also determine whether you can utilize less expensive sales channels (including the Internet) to lower your sales costs and increase EBITDA.
  • Excessive overhead — Are you paying an above-market rent rate? Has your payroll escalated without a proportionate increase in revenue? Is your staff overspending on office supplies and overnight shipping? Savings in these areas can have a direct impact on your EBITDA.

Boosting EBITDA Strategically

They key to boosting EBITDA strategically is determining where you can tighten things up and reduce spending — and just as importantly, where to devote resources that can help spur growth.
 
For example, if you operate in a manufacturing or high-tech industry, are you investing enough money in R&D to stay ahead of the technology curve? If you operate an Internet business, are you utilizing the latest online search optimization techniques to drive quality traffic to your website? Or if you run a retail business, are you managing your inventory to maximize high-margin product availability while minimizing waste?
 
It’s also important to rank your customers according to their lifetime customer value (or LCV). The fact is, all customers aren’t created the same: Some offer much higher spend potential than others. You should devote the bulk of your resources toward meeting the needs of your A-list customers if you want to increase EBITDA.
 
 
Your Cadence banker can help you strategize more ways to boost EBITDA and profitability, improve cash flow, and better position your company for loan approval. To learn more, contact your Cadence banker today.
 
This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.


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