Say it like it is!

As a financial consultant to business owners, I am often asked, “how does my business compare to others?” Whenever I hear this question I almost always direct the business owner to the only metric that is truly comparable from business to business.

EBITDA Margin is the metric, and it expresses the percent of Earnings Before Interest, Taxes, Depreciation and Amortization to total revenues. EBITDA is a measure of new cash flow generated by the business in a given period of time, usually one year or sometimes trailing twelve months. EBITDA Margin is the “percent” of total revenues represented by EBITDA. Stated another way, EBITDA Margin is the percent of each revenue dollar that ends up as new cash flow generated for the business.

This metric actually measures the effectiveness of your business model, and like most financial metrics, should increase over time if your business is operating more efficiently from year to year.

EBITDA margin for two distinct companies can actually be compared to see which business model is operating more efficiently. The greater the EBITDA margin, the more efficiently the business is creating new cash flow. And… the greater the valuation that will be assigned to the company.

And when the EDITDA margin is compared for the same business from year to year, it becomes readily apparent if the business is operating more efficiently from year to year.

So, if you want to know how your business compares to others, check out your EBITDA margin. Widely published for publicly traded companies, sought after by investors, and a key value driver for your business, EBITDA margin tells it all!


Bob Bowman
926 Goal Post Drive Dayton, OH 454548 P: 937-885-5548 F: 937-885-4254 C: 937-620-0859
email: [email protected] www.bowmancapitaladvisors.com

There is no single business metric that is crucial to every business nor every industry.

Most metrics are historical measures of ratios and relationships that the business deems critical to their success. The metrics may be financial but more often are measurements of volume or utilization of employees. In service industries metrics often focus on utilization of the billable personnel and billable hours versus paid hours. Call volumes are common metrics for sales personnel as are quote conversions into actual sales.

One metric that I think is important for all businesses to consider tracking is the projection of cash requirements. The term “Cash is King” is a well worn business statement, but the fact remains that cash is the lubricant that keeps business flowing. If a firm is projecting their cash needs for the next 13 weeks, they can have a reasonable picture of the risks to their cash position. And the projection gives them visibility in time to address and concerns. Without a projection, they are guessing. While experienced owners may be able to make reasonable educated estimates, documenting the thought process involved in the estimate will allow for refinement in the future.

A cash projection starts with an understanding of anticipated cash receipts from sales, receivables, and other sources such as tax refunds. These receipts are matched to anticipated expenditures to show the net cash generation/usage each week. Expenditure categories should be customized to each business. In many businesses payroll and benefits are a category. Payments for inventory purchases, rent, major insurance charges, capital equipment, and large variable costs also make sense to estimate on a weekly basis. Always include a miscellaneous category of expenditures and receipts to capture the unusual large items such as large quarterly or monthly payments. I recommend that a company track their weekly actual performance as a feedback to improve their estimating process.

If you don’t have a cash projection process or are not satisfied with the results you are seeing, I would be happy to meet with you and explore how to improve the process.