As a marketing professional, you should understand your company’s financial position, and that includes EBITDA. After all, it is a primary factor in developing strategic marketing plans, budgeting, scheduling, and managing resources.
Combining the predictive forces of marketing and financial planning can increase their total value. Common indicators of businesses’ financial health reflect such synergistic effects on the business’s profit potential.
Let’s look at the EBITDA calculation for business performance assessment, a preferred metric for use in financial analysis.
What Is EBITDA, and Why Is It Important for Businesses?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a method of measuring a business’s profitability.
Corporate finance specialists use it to help evaluate companies’ ability to produce profits and general financial health.
EBITDA’s insights make it valuable for business financial strategists, especially when they combine its ratio with other formulas. They include Cash Flow and Operating Margin, for a more well-rounded perspective on changes between gross and net margins.
Further, financial strategists find this metric ideally aligns with operating cost management goals and readily facilitates tracking progress.
EBITDA calculations offer a clearer view of expense and net income ratios. This clarity empowers business leaders to make accurate evaluations and predictions. Consequently, they can reach more informed decisions that affect stakeholders.
How Is EBITDA Calculated?
To calculate EBITDA consider the Earnings Before Interest, Taxes, Depreciation, and Amortization. This calculation offers a metric useful for assessing a business’s financial health and future profitability.
A top-to-bottom approach to calculating EBITDA involves subtracting Cost of Goods (COG) and operating costs from gross income. That method leaves only the factors below to be subtracted to find the net income total.
However, a more efficient option is to add these expenses back to the net income total to calculate the business’s effective profit before this set of fixed costs.
Financial analysts use various earnings calculations before certain expenses to gain a fuller perspective on the business’s financial position. Some common examples include EBT, EBIT, EBIAT, EBDA, EBITDA, etc. The equations below are the two at the center of our discussion.
Generally, an EBITDA margin of 5% to 10% is a good ratio. However, one or more of many possible factors may skew the ratio, causing it to appear more or less favorable by misrepresenting business realities.
In adjusted EBITDA calculations, we omit one-time or non-recurring gains or losses in the earnings and cost categories. For example, this calculation does not include one-time gains, asset write-downs, and similar.
EBITDA and Overall Business Goals
In business, various expenses like interest charges, taxes, and equipment depreciation can heavily impact financial health. However, when we calculate Earnings Before Interest, Taxes, Depreciation, and Amortization, we focus solely on revenue generation after accounting for basic costs. This excludes fixed costs like rent or salaries.
So, while EBITDA doesn’t consider all expenses, it serves a specific purpose: to show how well a company generates cash flow before deducting fixed costs. It’s a useful metric for assessing operational efficiency and profitability, especially in comparing companies within the same industry.
Understanding your company’s EBITDA is valuable for setting goals and making strategic decisions. It provides insight into your business’s core revenue-generating ability, helping you gauge performance and identify areas for improvement.
EBITDA as a performance indicator
Harvard Business Review examined financial strategists’ widespread use of the EBITDA formula to determine their companies’ potential profitability.
The EBITDA margin is a globally preferred indicator of a company’s overall financial health.
The pretax income total from the EBITDA formula quantifies the business’s performance in terms of its earnings and operating effectiveness without complicating the evaluation with figures on fixed costs largely unrelated to operations.
While the EBITDA metric offers a useful, though nuanced, representation of a business’s effective cash flow position, some analysts dispute it as a viable metric.
They argue it does not include all the expenses accrued, and those costs being paid during a given tax accounting period is less logically problematic than not including them in this interim metric.
Therefore, some experts assert that the Cash Flow metric is more transparent and comprehensive. Further, they point out that the outcome of EBITDA calculations can be inadvertently skewed or deliberately manipulated to create inaccurate impressions for investors.
Leveraging EBITDA to drive growth
Despite all the criticism, EBITDA is widely applied as a corporate performance metric that reflects a company’s ability to generate cash flow.
Capitalizing on an EBITDA-based growth formula requires adopting strategies to optimize efficiency, minimize operating costs, and increase revenues.
Just a few examples of highly successful Nasdaq-traded companies that use EBITDA margin calculations to track improvements in that metric include:
- First Horizon Bank
- Empire State Realty Trust
- Brookfield Infrastructure
- Energy Transfer LP
- Numerous others
The EBITDA margin indicates profitability after COG and operating costs. At least one leading global investor has publicly referred to the metric as an alternative to the cash flow calculation.
The EBITDA margin is an especially clear figure for examining budget effectiveness, spending cuts, etc. An increased EBITDA margin reflects an improved Total Operating Expense to Total Revenue ratio.
EBITDA’s impact on investor relations
EBITDA’s meaning and relevance to investors are more relatable for marketing leaders who educate themselves on the metrics that top decision-makers use to manage capital investments, tax liabilities, asset depreciation schedules, and many other cost controls.
It’s fair to say that the accounting industry’s best practices for presenting EBITDA data to investors and analysts do not formally exist, since they usually do not recognize the calculation as a standard accounting principle. Its use is limited to informal data calculation, not for formal financial reporting.
Although EBITDA does not meet the criteria for generally accepted accounting principles, the formula is highly valued as a work tool for financial analysis and illustration in communications with stakeholders.
Integrating EBITDA into business planning
For financial managers and strategic planners who have not yet incorporated the EBITDA formula into your company’s metrics, it may be time to consider applying the calculation to obtain an expanded perspective.
At the same time, it grants a more granular look at the breaks between profitability tracking points than operating margin or cash flow reports alone can convey.
For marketing management professionals intent on helping in the broader-scope planning process, it may make sense to introduce the relatively easy and convenient EBITDA calculation to enable strategists to pull out data unobstructed by less immediately applicable fixed cost metrics. It can be beneficial for gaining a more transparent view of the core profitability of company operations.
EBITDA and Marketing Goals: What Marketers Should Know
In the digital information age, high-quality marketing content increases website visitor traffic and client engagement. Successful marketing initiatives are likely to improve a business’s EBITDA.
After all, marketing is the company’s revenue-generating engine and its most potent promoter of brand awareness. It’s stakeholders’ primary force for customer acquisition and retention.
All these success factors, of course, positively impact EBITDA. So, it is advisable to understand and be able to speak in terms of EBITDA when explaining the value of your existing campaigns and ongoing marketing programs to top management.
EBITDA and Content Marketing
Marketers need to communicate, for example, how a current campaign, ongoing function like content creation, or social page engagement program can influence C-suite short- and long-range strategies.
Content marketing ROI
Content creation is the centerpiece of a comprehensive modern marketing package.
Today’s leading marketing strategies are built around compelling anchor content in web pages, blogs, articles, ads, and social media spaces that resonate with a brand’s audience.
EBITDA reflects the company’s ability to parlay the market impact of its content generation and other formulae that reveal the business’s marketing success.
Cost control and efficiency
Effectively targeted and crafted content created using efficient content planning and budgeting practices can consistently and positively influence EBITDA indicators.
Helping marketing managers increase departmental efficiency and control costs requires robust optimization strategies for content production.
These are likely to feature updated technologies, including at least supplementary AI research tools and other automated processes for maximizing production efficiency.
Revenue generation
Countless successful content marketing campaigns have engaged target audiences and led to increased sales and profits for major companies.
One example is Apple’s organic social media campaign “Shot on iPhone“, back in 2016.
The campaign intended to show off the clarity of the iPhone 6’s camera. Seventy-five iPhone users submitted a total of 77 images.
Measuring the ROI in their marketing campaigns through changes in their EBITDA margins has consistently confirmed the effectiveness of their programs.
Proponents of EBITDA emphasize that it is easily utilized specifically because the equation removes fixed costs that obscure operations’ profitability.
Their point is that those numbers crowd out the most relevant data. Those cost factors, they insist, can be accounted for after the EBITDA margin has been calculated to arrive at the net profit total.
Content marketing campaigns can directly contribute to revenue generation and improve EBITDA. Strategic content creation efforts lead to increased sales, higher customer lifetime value, and enhanced business profitability.
Alignment with business objectives
Aligning marketing content production with your company’s larger current and long-range goals is the first requirement for optimal outcomes.
Creating high-quality content that ideally adheres to Google ranking criteria and aligns with the company’s mission and goals is a formula for marketing management success.
Making these two imperatives your permanent primary guidelines ensures your marketing team does everything possible to advance the organization’s present and future objectives and goals.
Marketing department goals structured accordingly are sure to:
- Align with the company leadership’s vision
- Promote increased visibility in the market
- More efficiently attract and engage the target audience
- Contribute to increased sales conversion rates
- Produce content strategies that promote revenue growth
- Improve departmental budget management controls
- Promote general profitability and sustainability of the business
- Align with EBITDA evaluation objectives
Measuring success
EBITDA calculation is currently a very popular method of measuring positive changes in a business’s earning power, as indicated in Fortune magazine’s June 6, 2023, celebration of business successes featuring impressive EBITDA margins. Of course, various alternative calculations show profitability indicators from other vantage points than the EBITDA margin alone. For example:
- EBIT = Earnings Before Interest and Taxes
- EBITA = Earnings Before Interest, Taxes, and Amortization
In marketing programs that rely heavily on content production and publishing, department leadership should mandate collaboration with the CFO or Finance VP. The focus should be on increasing ROA and broader-scoped metrics like EBITDA and related reports on margin changes.
Consider implementing various initiatives:
- Regularly update evergreen content.
- Follow trends on social platforms.
- Test different campaign approaches.
- Monitor progress with financial reports.
- Improve content for better Google rankings.
- Encourage collaborations within and across departments.
- Experiment with new ideas to stay innovative.
EBITDA digs deeper than gross profit calculations or other high-level profitability formulae. Combined with other metrics, you can track the broader effects of your marketing department’s success in generating revenue increases.
EBITDA Frequently Asked Questions (FAQs)
Other common questions people ask about this topic include these:
What does EBITDA actually tell you?
The EBITDA calculation shows the amount of a business’s income before interest, taxes, depreciation, and amortization expenses are subtracted to produce the net income total. This information affords financial strategists an alternative picture of the company’s cash profit position before they subtract ITDA costs to determine net profit.
What is EBITDA for dummies?
Explained in the simplest terms, EBITDA stands for earnings before subtracting interest, taxes, depreciation, and amortization to find total net profit. Corporate finance specialists use this calculation to evaluate a company’s general financial health and ability to produce profits.
Is EBITDA a good measure of profitability?
EBITDA is one indicator of the financial effectiveness of a business’s routine operations, including managing essential costs for inventory purchasing, production materials, and labor. Some business analysts view EBITDA as an excellent measure of a company’s profit potential.
Is EBITDA the same as gross profit?
Gross profit is company revenues after subtracting the cost of goods sold (cost of inventory purchase or production). EBITDA measures the company’s earnings before interest, taxes, depreciation, and amortization are subtracted to calculate net income.
Conclusion
Marketing leaders who choose to track metrics of strong interest to companies’ top decision-makers can better align their department plans with organizational goals. Such a shift in a marketing department alone raises the synergistic value of marketing and financial strategies as they pertain to those metrics.
Although the EBITDA metric does not include some essential cost factors in similar evaluations, numerous corporate financial experts will continue using it, along with other key calculations such as operating profit margin and cash flow. In that context, business leaders worldwide rely on EBITDA’s valuable insights to accurately assess their organizations’ financial health.
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