EBITDA Explained: How Understanding This Simple Metric Can Improve Your Business (Even if You're Not Selling)
EBITDA helps you clearly measure business performance. Easily calculate EBITDA using your existing financial tools, e.g., Quickbooks, and learn simple, affordable AI tools that improve your profits, simplify operations, and boost your business valuation.
You Don’t Need an MBA to Know Your Numbers
Many successful business owners keep their focus on two simple numbers: cash coming in and money going out. There's another number, EBITDA, that every owner should understand, even if selling isn't in your immediate plans.
Why? EBITDA helps you clearly understand your business profitability. Knowing it leads to better decisions and positions your business for greater success.
This guide clearly explains EBITDA, shows how businesses are valued, reveals practical ways to increase profitability using simple AI tools, and demonstrates how to quickly find your EBITDA using QuickBooks or similar accounting software.
What Exactly is EBITDA? (No Finance Degree Required)
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
In straightforward terms:
"EBITDA shows how much money your business generates from its core operations, ignoring interest payments, taxes, and accounting entries like depreciation."
In other words, EBITDA tells you how much money your business really makes from just doing its job—before you worry about loans, taxes, or tricky accounting stuff.
Think of EBITDA as a clean measure of operational profitability. It helps you easily track business performance, compare yourself to peers, and make informed financial decisions.
| Metric | Amount |
|---|---|
| Revenue | $1,200,000 |
| Minus Cost of Goods Sold | ($600,000) |
| Minus Operating Expenses | ($400,000) |
| Add Back Depreciation | $40,000 |
| EBITDA | $240,000 |
Operating expenses include rent, payroll, marketing, etc.—but not interest or taxes, which come after operating profit and are excluded from EBITDA.
Why Track EBITDA Even if You're Not Selling
Better Decisions: Quickly understand your operational performance.
Reliable Benchmark: Consistent metric for comparing year-over-year results.
Credit-Worthy: Lenders frequently assess EBITDA for business loans.
Future-Proofing: Companies that track EBITDA are generally healthier and easier to sell when the time comes.
Other Important Business Metrics to Know
While EBITDA is important, successful business owners should also understand these additional key metrics:
| Metric | What it Tells You | Healthy Target |
|---|---|---|
| Gross Profit Margin | Profitability of your products or services | Steady or improving trends |
| Working Capital | Ability to meet daily financial obligations | Positive and stable balance |
| Customer Concentration | Dependence on one or two large customers | Largest customer under 20% of total revenue |
| Seller’s Discretionary Earnings (SDE) | EBITDA plus owner salary and perks (common for smaller businesses) | Clearly documented |
How Businesses are Valued (and Why it Matters Now)
When businesses sell, buyers often use a multiple of EBITDA, usually between two and four times. Even if selling isn't currently a goal, improving EBITDA today increases your future value.
For example, a small improvement of $10,000 in EBITDA could translate to $30,000 more if your business sells at a multiple of three times EBITDA.
Why Buyers Prefer Turnkey Businesses
Many business owners overlook a crucial fact. Buyers prefer businesses that don't rely heavily on the current owner. Companies with clear procedures, trained employees, and diverse customers are less risky and valued higher.
How to Find Your EBITDA Using QuickBooks or Other Accounting Software
QuickBooks and similar accounting software don't provide an automatic EBITDA calculation. However, finding EBITDA is still straightforward using your Profit and Loss (P&L) report.
Step-by-Step EBITDA Calculation from QuickBooks:
Generate a Profit and Loss Statement:
Open QuickBooks.
Select Reports, then Profit and Loss.
Choose your reporting period (such as Last Fiscal Year).
Find the Following Numbers:
Net Income (bottom line)
Interest Expenses
Taxes Paid
Depreciation and Amortization Expenses
Calculate EBITDA Manually:
Note: There’s more than one way to calculate EBITDA depending on what report you’re starting from. The first example above starts from Revenue and removes operational costs.
This next example starts from Net Income, and then adds back the interest, taxes, and non-cash charges to arrive at the same result.
Use this formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
| Item | Amount |
|---|---|
| Net Income | $180,000 |
| Interest | $20,000 |
| Taxes | $30,000 |
| Depreciation and Amortization | $10,000 |
| EBITDA | $240,000 |
Your EBITDA calculation would be:
$180,000 + $20,000 + $30,000 + $10,000 = $240,000
Note:
This simple calculation also applies if you use other popular software such as Xero, FreshBooks, or Zoho Books.
Easy Ways AI Can Improve EBITDA Right Away
AI isn't just for tech companies or corporations. Small businesses can easily access affordable AI tools to quickly increase profits, simplify operations, and reduce dependency on the owner.
| AI Tool | How it Improves Your Business | Immediate EBITDA Impact | Operational Benefit |
|---|---|---|---|
| AI Bookkeeping | Automates expense tracking and management | Lower administrative costs | Real-time financial clarity |
| AI SOP Tools | Quickly creates procedure manuals | Reduced training costs | Consistent operations |
| AI Inventory Management | Predicts demand and minimizes inventory waste | Lower inventory expenses | Improved cash flow |
| AI-Powered CRM | Automates sales follow-ups and client interactions | Increased sales revenue | Reduced reliance on owner |
A Quick Note on AI and Privacy:
Considering AI tools for your business? It's important to know how your data is handled. For clarity on privacy and responsible AI use, check out our comprehensive guide: ChatGPT and AI Data Privacy for Businesses.
Your Simple 48-Hour Action Plan to Boost EBITDA
Whether you're preparing for a future sale or just want a healthier business today, improving EBITDA is always beneficial. Here's how you can start immediately:
Clearly calculate EBITDA from your last year’s financial statements.
Find one expense you can trim or renegotiate.
Choose one of the AI tools listed and automate a single repetitive task.
Clearly document the new process, making your business less owner-dependent.
Recalculate EBITDA and note your improvement. Repeat this regularly.
Ready to Make EBITDA Work for Your Business?
Wondering how quickly AI can boost your profits, streamline your processes, and increase your business’s value?
Book your free AI-Readiness Audit today. Together, we’ll uncover simple steps that make your business more profitable, easier to manage, and worth more in the long run.