What are EBIT and EBITDA?
Every industry has its jargon, but sometimes ours seems to have its own language! We’ve been translating some of our jargon for clients recently, notably EBIT and EBITDA. What do these terms mean? Watch this to find out!
Hi and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and to help your business grow.
Around accountancy there’s an awful lot of jargon. There’s a lot of abbreviations and a lot of initials and all of those sorts of things.
This episode I’ll explain to you some abbreviations that we’ve been explaining to a client this week, EBIT and EBITDA.
EBIT is ‘Earnings Before Interest and Tax’ and EBITDA is ‘Earnings Before Interest and Tax, Depreciation and Amortisation’.
What those two numbers are doing is stripping out some of the variables within a business in terms of the costs. This enables potential investors or potential purchasers to compare different businesses. Stripping out lots of variables gets you back to the basic numbers to be enable you . You can then compare business to business and see how they stack up against each other essentially.
- So, EBIT (earnings before interest and tax) that shows the cash that’s being generated from the operations of a business. It takes out the cost of any finance and any tax costs, so by that I mean corporation tax, and also some things like withholding tax if there are other countries involved.
- EBITDA (earnings before interest, tax, depreciation and amortisation) is essentially saying let’s take out the finance and structural costs of holding assets and things like goodwill.
Depreciation and amortisation in themselves, amortisation in particular tends to be another piece of jargon that people don’t necessarily understand.
Amortisation at its most basic is depreciation for an intangible asset.
So, for example, it’s writing down or discarding the cost or the value of an intangible asset, so goodwill. Goodwill may be said only to be valid for a period of time, it could be six months, it could be 12 months, it could be five years but you need to actually write down that value. Essentially it’s no different to depreciation, it’s just the same thing, kind of, on a different set of assets.
So, EBITDA is taking out all of the finance and structural costs of the business. Both figures are stripping out those variable costs so that you can reliably compare a business.
They are really good figures to keep an eye on if you’re managing the business properly. This is because the revenue and expenses that EBIT reflects are costs and expenses that actually you can manage more easily than the others. It’s a really good number to find, work out how to find and then monitor regularly.
If you need a hand with finding it, if you’re on Xero or QuickBooks, that’s relatively straightforward. Anything else, it’s slightly more involved but get in touch, we can show you how to do that and we can talk you through that process.
If you need more of an explanation that I’ve given in this brief video, then again, please do get in touch, we’d be happy to explain that. We can come at it from lots of different directions and just make sure that you understand it because they’re really good numbers to know.
That’s it from BaranovTV this week; I’ll see you all very soon.
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