Understanding your profit and loss statement-EBITDA -Earnings before interest tax depreciation and amortization

The single most important financial figure you should be looking at each month…

Have you heard of the word ‘EBITDA’? If no, that is ok. We totally understand that as business owners and entrepreneurs, we are busy with our main line of business. The only time many of us may even look at financial reports is probably around tax time or when you are applying for a bank product eg: credit card or line of credit or a bank loan.

So, we wanted to provide a quick guide to entrepreneurs and business owners to help them with their monthly financial reviews.

Coming back to our first question, so what is EBITDA and why is it so important?

EBITDA stands for Earnings before Interest Tax Depreciation and Amortization.

Why does it matter?

EBITDA is one of the most commonly used financial operating measures used by analysts.

EBITDA enables most analysts and investors to focus on operating measures i.e. the components that are directly correlated to the Profit and loss of the business. It excludes any non-cash expenses like depreciation and amortization, tax rates that may fluctuate year to year or interest expenses that may be calculated based on the financial decisions during the year.

While there may be few drawbacks looking at only EBITDA, we still consider this to be an easy and important amount for most business owners to understand while reviewing their financials.

It’s also one of the most important and commonly used figures used to compare other companies in a similar industry by business valuation experts.

So how is EBITDA calculated?

Below is a quick summary and an example :


Profit and loss statement for ABC Company:

Sales Revenue $100,000

Cost of Goods sold $50,000

Gross Profit $50,000

Salaries $10,000

Rent $1,000

Depreciation $4,000

Amortization $1,000

Operating profit (EBIT) $34,000

Interest $5,000

Earnings before taxes (EBT) $29,000

Taxes $5,000

Net Income $24,000

To calculate EBITDA= EBIT + Depreciation + Amortization

EBITDA in the example above =$34,000+$4,000+$1,000

Therefore, EBITDA would be $39,000


If you have not been reviewing your monthly profit and loss account regularly, you are not alone. However, taking control of your financials and understanding your profit and loss account regularly will enable & empower you to run your business efficiently.

So, this upcoming financial cycle-are you going to look at your EBITDA?


Posted In: Accounting

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