It’s no secret that EBITDA (earnings before interest, taxes, depreciation, and amortization) is the key metric for financial advisors to focus on when crafting a client’s investment plan.
Companies that can save money on EBITDA are able to provide their investors with higher returns while still being profitable. However, many investors don’t understand that companies do not make money when they expense their operational costs.
Instead, these costs are considered operating expenses, which is why they are labeled this way in corporate finance texts. While this makes intuitive sense at first glance, it is essential to understand that it isn’t always the case — and even if it is often the case for some companies, it doesn’t mean that all other companies should follow suit.
What is EBITDA?
EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s profits before interest, taxes, depreciation, and other ordinary and necessary expenses are applied. It is calculated by subtracting operating expenses from net income.
Why does EBITDA Matter?
Given that operating expenses are the largest single expense for most companies, it makes sense that they would be the first to be cut. If a company can reduce its operating costs by 1% without reducing its earnings, that means that the company can raise its share price by 1%. The same logic can be applied to other expenses like property taxes, maintenance, or even interest on the debt. Reducing these costs can allow a company to generate more profit and increase its share price.
How to Save Money on EBITDA
There are several ways to reduce your expenses to increase your EBITDA. This includes things like reducing payroll, hiring more people, or increasing your sales. Each of these will cost money, but in the long run, it will all save money.
Find areas where you are overspending. If you are finding that your operating expenses are higher than your income, you may have some areas to focus on. One way to do this is to find out what areas of your company are spending the most money and cut those down.
Reimagine your company’s culture. Some companies find that their culture just isn’t benefitting from a change in ownership. A top-level restructuring can be a great way to cut costs and increase profitability.
6 Structured Ways to Improve your EBITDA
There are a number of ways to improve your EBITDA, including the following:
- Find and implement a structured cost-savings plan
- Decrease your costs by streamlining your operations
- Cut your expenses by getting rid of inefficiencies
- Change your priorities
- Improve your talent by bringing on new employees
- Improve your business model
Reduce your Costs and Increase your Profits
Reduce your costs and increase your profits to improve your EBITDA. This is done by either cutting expenses or increasing your revenue. Reducing your costs is always the first step to increasing your profits.
One way to do this is by outsourcing work. A great way to reduce your costs is to bring in contractors who can work for you but instead of paying them directly, pay them through a third-party network.
Another way to reduce your costs is to look into your company’s purchasing power. If you have been paying for the same items for years, it may be time to look at what you are paying for and consider alternatives.
