If you’ve seen our “I heart EBITDA” stickers, you know that Finance is obsessed with this funky EBITDA acronym and provides a great deal of insight into the business. As the corporate controller for Planful, I have been asked “what does EBITDA mean?” and “why use EBITDA?” Well, now I’m taking the opportunity to explain it.
Adjusted EBITDA vs EBITDA
Let’s start with the EBITDA definition: EBITDA is short for Earnings Before Interest Tax Depreciation and Amortization. It is often used as a proxy for cash flow and is a measure of profitability. It is a good indicator of how well the company is generating revenues and managing non controllable expenses because it excludes components such as interest, tax, and depreciation. Analysts and investors often use EBITDA or EBITDA margins to quickly understand the company’s profitability trends and compare it to its peers within the same industry.
The basic EBITDA Calculation:
EBITDA = Earning + Interest + Taxes + Depreciation + Amortization
There are also adjusted variations of EBITDA to account for non-cash expenses, or one-time irregular charges say for that period. Common examples are stock compensation expenses or restructuring charges. The adjusted EBITDA definition is as follows:
Adjusted EBITDA = EBITDA + other non-cash expenses + other one-time irregular charge
Why we <3 EBITDA in Finance
Many may ask why is EBITDA a good measure? EBITDA tells a better story than net income or net loss. Usually, EBITDA is higher than Net Income and is a measure of controllable profitability. The calculation does not penalize the company for investments made into the company (i.e. the cost of obtaining debt and capital expenditures) nor for non controllable expenses (i.e., taxes). When used in evaluating operating cash flows, EBITDA excludes the impact of timing of collection and payments to vendors. On top of that, the adjusted EBITDA calculation also excludes non-cash expenses, so it is an even better indicator of operation cash flow.
How we use Planful to Report EBITDA
Using Planful fp&a platform to automate the calculation and reporting of EBITDA is as simple as it can get. We build a definition (a statistical account) to calculate EBITDA based on the actual numbers in the system. For the expenses that don’t map to specific accounts (i.e., we report restructuring charges to severance expense, rent expense, benefits, etc.) we create memo accounts that we input the values to. With all the values in the system, we use Planful Modeling and Spotlight to automatically report historical figures as well as forecasted figures into graphs for presentation to the board.
The neat thing about Planful, is you only have to build the definition once and you can incorporate EBITDA use into any report and dashboard you chose (i.e. Income Statement, Cash Flows, executive dashboards). The data and the forecast is live so I can see where it lands in comparison to plan in real time.
On top of the historical figures, the EBITDA calculation can also use the forecast or budget to report forecast and budget EBITDA.
All in all, EBITDA gives a better understanding of where the business is operating and where we are regarding cash flow. And with Planful in my toolbox, I can quickly get the right numbers to my CFO with the confidence that this is the most up to date and accurate information.
If you want to hear about more how we can automate the EBITDA calculation and EBITDA use, please reach out to us.