Why is EBITDA Important?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. More importantly, it’s a quick way to estimate how much cash your business creates.

I have an article that talks about the difference between profits and cash flow. If you’re only monitoring your P&L, you’re not watching your company’s ability to create cash.

Someone who does care about your company’s ability to create cash is your banker. For business loans, one of the main metrics they use to decide whether to give you a loan is called the Debt Service Coverage Ratio (the DSCR).  

Your DSCR is your EBITDA divided by the sum of your loan principal and interest payments for the next year. If I lost anyone with those acronyms and formulas, let me just simply this. 

The bank wants your operating cash flow (EBITDA) to be higher than your loan payments. Most banks and the SBA want your EBITDA to be at least 25% more than you’re your loan payments so you have a little cushion. This is equal to having a DSCR of at least 1.25.

If you are thinking about getting or increasing a commercial loan, knowing your EBITDA helps you estimate how big of a loan payment your bank will allow you to have.

EBITDA is also used to value companies. Having a strong EBITDA increases the value of your company if you were to sell it.

- Rob Stephens

Further Insight

  • I was featured in a Business News Daily article titled What is EBITDA that explains EBITDA and importance in more detail. 

CFO Perspective Resources

  • Video: What is EBITDA? - Knowing your company’s EBITDA helps you better understand your cash flow and how your company looks to lenders or investors. I’ll explain what EBITDA stands for and how to calculate it. I show a sample income statement and how EBITDA is calculated from it.
  • Course: Managing Cash Flow - This course shows you how to assess current and future cash flows. You learn techniques to increase cash flow and reduce dips in cash flow. I list critical sources of cash for businesses, along with the pros and cons of major sources.
  • Course: Business Loan Basics – Get the basics on how to business loans work. I’ll show you how to navigate the loan process. You’ll also learn tips on how to get lower loan rates.
  • Book: Conquering Cash Flow: The Complete Guide to Small Business Cash Flow Management - Learn how to manage your cash better so you can improve your cash flow, increase your profits, grow your business, and reduce your stress. Discover proven methods to conquer your cash flow.

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