This week, I’m coming at y’all with a hot take.

Ready?

EBITDA is overrated.

It looks great on paper, but it’s not making your business any better.

“But what if I want to sell?”

“Every bank checks it.”

“It’s crucial for startups.”

That all may be true. For external parties like banks and lenders, EBITDA does matter. But aside from knowing where you stand with it in those cases, EBITDA doesn’t help you run your business any better.

Instead, you’re far better off focusing on your Net Income, Operating, and Free Cash Flow.

Bold statement, I know.

I don’t just expect you to take my word for it though.

This week I’ll make the case for why EBITDA isn’t worth obsessing over—and where to spend your time instead.

Let’s get into it.

Why EBITDA’s an Overrated Metric

To begin, let’s define our terms.

Short for earnings before interest, taxes, depreciation, and amortization, EBITDA is just another way besides Net Income to measure profitability.

It’s calculated by adding interest, taxes, depreciation and amortization back to Net Income. Notably though, EBITDA leaves out capital costs and can consequently overstate how profitable you really are.

Despite its limitations, EBITDA is often used by external parties to track the underlying profitability of a business aside from their present financing choices or depreciation schedules.

But there are still a few problems with relying too heavily on it as an owner. For one, the way it’s calculated can vary a bit from one SMB to the next. Ignoring your capital costs can also be dangerous—especially if they’ve been rising for some time. Additionally, because EBITDA can make your business look better than it is, you might overlook significant operational challenges.

Focus on Net Income & Cash Flow Instead

If you’re looking to assess profitability, Net Income will give you a much more complete picture of it than EBITDA. Because Net Income takes into account every kind of cost your business has to absorb, you can more readily detect problems in your business and control costs before they get out of hand.

While EBITDA is often touted as a better measure of the day-to-day profitability of a business than Net Income because of its omissions, tracking both Operating and Free Cash Flow will tell you far more about the operational health of your business than EBITDA can.

Operating Cash Flow, just like it sounds, measures cash generated from core business operations. Free Cash Flow is calculated by taking Operating Cash Flow and then subtracting out capital expenditures. More on these in the coming weeks. All you need to know for now is that either of them will give you far more clues about where to cut costs and what to double down on than just considering EBITDA.

So there you have it—why EBITDA’s an overrated metric and where to focus instead.

If you need help or have any questions, feel free to reach out.

As always, I’m happy to assist.

Putting It All Together

Here are your top takeaways from this week’s post.

1. EBITDA’s important to track for external parties like banks, lenders, and/or buyers, but it doesn’t help you operate your business any better.

2. Because EBITDA omits capital costs, it can paint an overly rosy picture of profitability relative to Net Income.

3. While EBITDA focuses more on a business’s day-to-day operations than Net Income does, Operating and Free Cash Flow tell you more specifically what needs to change to improve the business.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Book a call to learn how Scalable can transform your SMB.

3. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor