Managers and CEOs sometimes make the mistake of focusing too much time and attention on sales revenue and not on more accurate metrics of success. In the Forbes article “Your Obsession With Sales Revenue is Killing Your Growth,” Robert Sher explains that too many CEOs are determining the health of their companies simply by the amount of revenue they see, which gives an inaccurate picture.
Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure that indicates an organization’s income after accounting for operational costs but before including a number of other variables. This metric gives a more accurate depiction of the health and value of an organization’s operational structure. Though interest, taxes, depreciation and amortization are important when discussing an organization’s cash flow, these values can mask the effectiveness of a company’s operations as they are subject to change and often out of the organization’s control.
EBITDA is determined by subtracting the sales cost, administrative costs, and research and development costs from a company’s revenue. In an interview with Business News Daily, Joseph Ferriolo calls EBITDA the most important measure investors consider when a company is being bought or sold. He says, “If I was going to invest, my primary concern would be ensuring that the business had an audited, up-to-date EBITDA analysis.”
Why is this metric so telling? Questions investors are asking questions that include the following: Which organization is most capable of generating income? How much money is generated considering the cost of operating in this market? Investors look at EBITDA to compare the profit generating capabilities of different companies, knowing that this metric considers the company’s cash flow independent of variables unrelated to capability.
Revenue Vs. Earnings: What’s the Difference and Why Does It Matter?
While a company’s gross profit only takes into account revenue minus the cost of goods sold, EBITDA offers a better view into the company’s earnings because it includes the total revenue minus overhead costs, salaries and R&D. A company’s ability to make money is reflected through such earnings, not simply based on the dollar amount in its gross income.
Knowing and evaluating EBITDA is not just for the accountants — it’s relevant to everyone in the company. It’s not uncommon, for example, for the quota given to the sales team to be directly tied to the company’s EBITDA. As a sales manager or business developer, your team’s bonus distributions might be a direct result of this value. You might be tasked as operations manager with creating more efficient processes to increase these earnings or lower operational costs.
Regardless of the position in the company, the EBITDA plays a role in how and how much each member of the company is paid.
These and related subjects are part of the core coursework for the Pittsburg State online MBA program. Students will learn more about EBITDA in MGT 826: Quantitative Business Analysis and FIN 836: Financial Strategy, which are part of the core coursework.
Through concentration courses offered in the online MBA in Accounting program, Pitt State also provides courses for students in higher levels of organizational accounting such as ACCTG 813: Quality: Financial Statement Analysis and ACCTG 815: Financial Statement Auditing/Seminar in Auditing.
Learn more about Pittsburg State University’s online MBA program.