What is EBITDA?

Adjusted EBITDA vs EBITDA 

Let’s start with the EBITDA definition: Earnings Before Interest Tax Depreciation and Amortization. It is often used as a proxy for cash flow and is a measure of operating profit. 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 calculation:

EBITDA = Earning + Interest + Taxes + Depreciation + Amortization

There are also adjusted variations to account for non-cash operating 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? It 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, it excludes the impact of timing of collection and payments to vendors. On top of that, the adjusted EBITDA calculation also excludes non-cash operating expenses, so it is an even better indicator of operating cash flow.

How we use Planful to Report

Using Planful’s 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.

All in all, it 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.




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