What is EBITDA?

What is EBITDA?

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.

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Next-Generation Finance Cycles

Deloitte predicts that periodic reporting – such as quarterly financial reports – will become a thing of the past. We couldn’t agree more that the goal for all finance teams should be to get to a state of real-time forecasting, reporting, and analysis. The journey to this dream end-state requires a strategic vision, practice, and over time optimization of the people, process, and technology that drive these activities. For example, a best practice is to start by implementing a rolling forecast process as a phase one, and then over time optimizing that process so you that you begin performing it weekly, then daily, and then ultimately in real time.

The ability to provide periodic, out-of-cycle performance information will prove valuable for decision-makers looking to adjust strategies on-the-fly or reallocate resources to improve financial performance. As a result, finance teams that allow the technology to do the data collection and number crunching for them will have more time to focus on discovering new insights that will impact business decisions.

Self-Service Becomes the Norm

Deloitte acknowledges that self-service finance will make traditional finance teams uneasy, but the reality is that there are plenty of business people who don’t need hand-holding when it comes to an understanding of basic finance, running budget queries or processing specific reports. And as tasks like that become more automated, the system becomes smart enough with role-based security to learn who needs which reports and when, without the need for a human’s query. Over time, Deloitte also expects the technology to replace rows and columns of numbers with visually rich data that’s more intuitive and easier to use. For example, with either self-service dashboards to reduce the reporting burden or interfaces designed specifically for budget owners.

The Deloitte report also features some interesting insights into the larger role of finance, the changing skillsets of the finance workforce and the importance of cleaning up and integrating historical data to improve the analysis side of the operation.

As Deloitte says – “It’s crunch time,” meaning it’s time to look at technologies to get you to be where finance teams will be in 2025. To get make sure you financial proccess match with your technologies download our eBook for The Complete Guide to Modernizing Your Financial Processes.

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