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9 Ways To Increase EBITDA And Why It Matters
EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortisation - is a global financial standard measure of your business’s performance, providing a clear perspective of the financial situation before accounting obligations complicate the picture.
For larger businesses and corporations, EBITDA is a vital metric, used by lenders, investors, and potential buyers to assess your company’s operational strength and financial standing. Boosting your EBITDA will put your business in the best possible position when looking at funding options for expansion or a strong exit.
Key Takeaways
- EBITDA is a quick and efficient way to evaluate your business’s performance.
- By improving EBITDA, you increase your chances of low-cost funding, entice investment, and raise your business valuation.
- Partnering with Clifton Private Finance will give you access to the tools and knowledge you need to increase your EBITDA.
Why EBITDA Matters
When considering a statistical snapshot of a business, there are multiple metrics that can be considered. Of these, EBITDA offers an undiluted impression of the business’s financial operations.
Because EBITDA is calculated before any external influences, it is the clearest picture of how much money a business generates and is of great use to anyone looking to have a quick and neutral financial understanding of the business’s position.
EBITDA For Lenders
Lenders are most concerned with the business's affordability regarding loan repayments. EBITDA provides an insight into the business’s ability to generate income from operations and can be assessed quickly for an early understanding before lengthy underwriting.
Because EBITDA ignores complex factors such as depreciation and interest, it allows for a far easier comparison between similar-sized businesses, providing an overview that can be used to set borrowing limits, such as through debt-to-EDBITA ratios.
EBITDA for Investors
Investors often see EBITDA as a purer figure that doesn’t obfuscate the real financial picture through tax strategies or tactical accounting. Like lenders, investors can use EBITDA to compare between similar businesses, allowing them to quickly use past experience and easily obtained metrics to form a reliable overview of performance and investment viability.
A graph of rising EBITDA shows clear growth and effective operational strategy, greatly improving the enticement for investors.
EBITDA for Buyers
EBITDA is a key metric used for valuing a business for M&A (mergers and acquisitions) purposes. Often, businesses are listed simply through an EBITDA multiplier based on the core industry, for example, valuing the company at 4x or 6x EBITDA.
As with other uses, buyers appreciate the clarity of EBITDA, providing a benchmark that can be evaluated alongside other similar opportunities.
By boosting your EBITDA, you can significantly increase your company valuation for sale.
EBITDA for Internal Use
Senior leadership and management often utilise EBITDA as a KPI to track overall progress. EBITDA targets can be used to link to bonuses and other incentives, helping the business focus on generating gross profits rather than an over-reliance on post-tax revenue.
Keeping an eye on EBITDA provides you with a clear indicator for strategic growth and a greater understanding of the company overview.
EBITDA for Financial Advisors
At Clifton Private Finance, we use EBITDA to get a better picture of your business and develop a tailored funding package best suited to your needs. With a comprehensive EBITDA history that’s linked to your debt management, we can select superior finance products that can property target needs, whether for expansion or day-to-day cash flow.
We use EBITDA to show lenders and investors your business in its best light, improving your position for funding and opening the door to greater loan sizes with superior interest rates and unparalleled flexibility.
9 Ways to Increase EBITDA
Strategies that are concentrated on building EBITDA will improve your chances of top-level funding and investment, as well as maximising your business’s sale price and share value.
1 - Increase Revenue Without Increasing Costs
Concentrating on strategies that improve income without incurring any additional costs is the most basic way of increasing EBITDA. Strategies that fall into this category include:
- Raising prices where possible.
- Upselling and cross-selling.
- Improving client retention.
2 - Reduce Operating Costs
Cutting back on unnecessary expenses and managing outgoings has a similar impact on EBITDA as increasing revenue. Strategies that reduce operational costs include:
- Auditing current administrative processes with an eye to inefficiencies
- Re-evaluating regular outgoings, such as cancelling or reducing underutilised subscriptions
- Outsourcing work to improve financial efficiency
3 - Improve Gross Margins (Without Raising Prices)
Driving efficiencies to expand your profit margins without resorting to raising prices will boost your EBITDA figures:
- Re-evaluate your supply chain to cut back on logistics costs.
- Source cheaper materials.
- Improve operating procedures to increase production efficiency.
4 - Improve Productivity
With a rapid advancement in AI and associated technologies, it is a good time to reassess your productivity to impact EBITDA:
- Automate manual processes.
- Restructure administrative tasks to make the best use of software.
- Focus on staff training.
5 - Lower Customer Credit and Bad Debt
Extending credit to your clients and customers is an essential part of business. However, poor management and a lack of credit control can lead to holes in your cash flow that negatively impact EBITDA. Focus on your credit processes to limit the drain on your business:
- Invoice earlier in the process.
- Set out clear credit account guidelines and implement credit control.
- Offer discounts for prompt payment.
6 - Reduce Staff Turnover
Losing essential staff members leads to a significant drop of productivity and extra expense in recruitment and training. Keep the business running smoothly by focusing on staff retention:
- Develop processes that improve work/life balance.
- Invest in human resources to show employees their value.
- Provide effective training and career growth opportunities.
7 - Limit Capital Load
Large drains on your capital have a considerable impact on EBITDA. Spreading the load by moving to a leasing model over permanent ownership will improve both your cash flow and your essential metrics:
- Utilise asset finance to lease rather than buy significant assets, such as vehicles and equipment.
- Evaluate asset requirements and consider alternatives, such as cloud-based solutions over in-house hardware.
- Strategically implement debt finance solutions to spread capital strain.
8 - Defer and Reduce Capital Expenditure
As depreciation and amortisation are calculated after EBITDA, investment timing can have a significant impact on current EBITDA calculations. By shifting your investment timing, you can temporarily boost your EBITDA for short-term use, such as for loan applications or for a higher market valuation. Speak to a specialist business finance advisor to discuss how to best optimise your capital expenditure.
9 - Optimise Working Capital
One of the primary ways Clifton Private Finance can help you directly with your EBITDA is through use of debt finance tools to boost your working capital.
This includes:
- Using cash flow tools, such as invoice finance to smooth your day-to-day expenses and lighten the load on capital.
- Improving your relationship and terms with suppliers by leveraging your capital through dynamic discounting.
- Exploring bridging finance to cover temporary capital shortfalls and make the most of opportunities.
- Set up comprehensive revolving credit facilities to provide financial support as and when it is needed.
- Shift from an ownership to leasing model through asset finance, reducing your capital investment and improving accounting.
Clifton Private Finance - Your Strategic Partner to Increase EBITDA
Whether you are looking to raise capital, plan for a merger, or simply continue to expand your business, working to improve your EBITDA is a strong strategy. At Clifton Private Finance, we can help you.
Our dedicated corporate finance team will evaluate your business structure and existing strategies to develop a comprehensive package of funding solutions to benefit EBITDA. We help you restructure your finance, refinancing at better rates to increase EBITDA, and will ensure you fund your growth efficiently, without putting a strain on your operating expenses.
