Understanding EBITDA: What It Means for Your Small Business
As a small business owner, you’ve probably heard the term EBITDA tossed around by lenders, advisors, or business buyers. But what does it actually mean and should you be paying attention to it?
At White Pine Bookkeeping, we love breaking down financial terms into plain English so you can confidently understand your numbers. Let’s take the mystery out of EBITDA.
What Is EBITDA?
EBITDA stands for:
- Earnings
- Before
- Interest
- Taxes
- Depreciation
- Amortization
In simple terms, EBITDA shows how much money your business makes from its everyday operations without the impact of financing decisions, tax strategies, or non-cash accounting expenses.
It’s like looking at your performance on a level playing field. No noise, no distractions.
Why Does EBITDA Matter?
1. It Shows the Strength of Your Operations
EBITDA removes items that don’t directly relate to how well your business actually runs. This makes it a cleaner way to see your true earning potential.
2. Banks and Buyers Pay Attention
Lenders and potential buyers use EBITDA to understand how profitable your business really is, especially if you’re planning to grow, borrow, or eventually sell.
3. It Helps You Compare Your Business to Others
Because EBITDA removes tax strategies and financing differences, it’s easier to compare your results to similar businesses in your industry.
4. It Highlights Cash-Generating Power
While EBITDA isn’t the same as cash flow, it gives a solid snapshot of how much profit your core operations can generate before outside factors come into play.
How to Calculate EBITDA
Here’s the basic formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
This lets you “add back” expenses that don’t reflect daily business performance.
For example:
- Net Income: $80,000
- Interest: $5,000
- Taxes: $12,000
- Depreciation: $10,000
- Amortization: $3,000
Your EBITDA would be:
$80,000 + 5,000 + 12,000 + 10,000 + 3,000 = $110,000
That $110,000 represents the earning strength of your operations alone.
EBITDA vs. Net Profit: What’s the Difference?
Net Profit includes everything, interest, taxes, depreciation, amortization, and any other expenses.
EBITDA strips those out.
If you want a complete picture, look at Net Profit.
If you want to understand operational health, look at EBITDA.
Most lenders and investors will look at both.
Should Your Small Business Track EBITDA?
EBITDA is especially useful if:
- You want to understand the true strength of your operations
- You’re planning major growth or want to look attractive to lenders
- You expect to sell your business down the road
- Your business has heavy depreciation from equipment or vehicles
- You want a performance metric that’s easier to compare to competitors
Even if you don’t track it monthly, knowing your EBITDA gives you a clearer view of your financial health.
Bottom Line
EBITDA is a powerful tool for small business owners, especially those who want to understand the core performance of their business without all the accounting noise. It helps you see the true earnings your business can generate and prepares you for conversations with banks, investors, or potential buyers.
Need help understanding your numbers?
At White Pine Bookkeeping, we specialize in helping business owners read their financials with confidence and clarity. If you want to learn more about EBITDA, or understand what your statements are really telling you, we’re here to help.