How to improve your EBITDA (and what exactly does it mean)
EBITDA is one of the most important metrics to track, to improve your company’s overall financial health.
EBITDA stand for:
E - Earnings
B - Before
I - Interest
T - Tax
D - Depreciation
A - Amortisation
EBITDA can be used as a precise measure of your company performance. It can also be used to compare companies (in similar sectors) against each other, as costs related to taxes and interest expenses are removed from the equation.
It also plays an important role in company valuations, which can help steer investment decisions by financial institutions and potential investors.
Learn more about what exactly EBITDA is, here.
How to improve your EBITDA
The key to improving your EBITDA is by making sure you’re focused on both minimising spend and maximising revenue - to improve your overall profitability. But what does this mean for your business?
1. Consider less discounts
No doubt your customers love a good discount, but if you’re looking to improve your EBITDA consider reducing or pausing the discounts you offer. You want to ensure that the price you charge for goods and services is maintained. This can be a quick and easy way to improve your EBITDA.
2. Improve stock and resource management
Poor inventory management can affect your EBITDA. Companies that don’t keep on top of their inventory or don’t effectively manage their internal resources will notice an impact on their bottom line.
Making sure that stock levels are effectively maintained and customer orders are filled on time is a great way to improve this metric.It’s important to keep the right balance between production and sales to make sure excess stock doesn’t pile up and have a detrimental impact. Improving the use of your stock and resources can boost your net profit.
3. Review commission and bonuses
Do any of your employees work on commission or receive bonuses? Consider whether timing levers can be used to incentivise and reward staff for closing deals sooner or for closing accounts that help you get closer to your financial goals.
Is your commission plan helping you work towards your EBITDA goals? If clients take a while to onboard or it takes a few months before they can first be invoiced, consider deferring commission until payments from new clients have been received. Or do sales fluctuate a lot from month-to-month? Perhaps look at restructuring incentives to keep your team motivated during slower times of the year.
4. Ask yourself, is it necessary?
Improving your EBITDA also means getting a tighter control over your expenses. It’s worth asking yourself whether travel or entertainment are necessary (at least in the short term) while you try to improve your EBITDA.
Minimising the number of in-person meetings can even free up more of your time to focus on other projects. In a post-covid world, virtual meetings have become the norm so take advantage of this while you try to improve this metric.
5. Reduce your time to billing
Securing a new client takes a significant amount of time and effort such as marketing spend, sales team calls, onboarding tasks etc. If you’re not able to charge this new client for some time this can have a negative impact on your EBITDA - as you’re not seeing the money and time spent on securing them. Could earlier invoicing be an option? Look at whether set up fees or deposits can be taken, or whether it’s realistic to take a first payment upfront, to help reduce the time from signing up to receiving that first payment.
6. Automate repetitive tasks
Do you have any tasks or processes that can be automated? Doing so could reduce costs and increase employee productivity. There’s a huge amount of productivity tools available to cover anything, from filling in timesheets through to automatically sending invoice chasers. Reducing admin helps to free up time that can be spent on projects that improve your EBITDA.
EBITDA can be a reliable indicator of overall performance, and ensuring you have a thorough grasp of the relevant metrics can really pay dividends. Maintaining prices, reducing business expenses, boosting revenues and streamlining inventory management is often a valuable exercise to carry out at regular intervals regardless of the scale of the business.