Month: March 2022

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Introduction To EBITDA

EBITA

EBITA simply means Earnings Before interest, taxes, and amortization. Investors commonly use this acronym to measure the profitability and efficiency of a company and compare it with companies of similar nature. The term includes all costs associated with the capital assets, i.e. depreciation, by excluding associated financing costs and the amortization of any intangible assets, making it an accurate metric for measuring a company’s profitability. Further, it can also compare with EBIT (Earnings Before Interest and Taxes )and EBITDA (Earnings Before Interest Taxes Depreciation, and Amortisation) to get a better insight into the company’s earnings.

EBITDA

The financial metrics that measure a company’s overall financial health are commonly termed EBITDA or Earnings Before Interest Taxes Depreciation and Amortization. Often, there is an alternative to other metrics like revenue, earnings, or net income of a business. This metric excludes all expenses associated with debt and adds back interest expenses and taxes to earnings. It helps to compare the profitability of different companies and industries since it eliminates the effects of financing and capital expenditure.

Further, this metric serves in the valuation process and helps to compare the enterprise value and revenue. Currently, bankers widely use EBITDA to estimate the debt service coverage ratio (DSCR), a ratio that is explicitly used for business loans to measure the cash flow and ability to pay. Moreover, analysts and investors use EBITDA to get an idea about the company’s actual earnings, and it gives a picture of the company’s total amount in hand for reinvestment or to make payments as dividends.

Components of EBITDA

• Earnings: It denotes the amount of money that the company brings in over a certain period of time. The amount of earnings can be determined by simply subtracting the operating expenses from the total revenue.  

• Interest: It is simply the cost of servicing a debt. Generally in EBITDA interest is not deducted from earnings. 

• Taxes: As the name says EBITDA stands for Earnings Before Interest Tax Depreciation and Amorisation. Therefore tax expenses is not accounted for while determining the EBITDA value.  

• Depreciation and Amortization: The amount of depreciation and amortization are added back to operating profit to arrive at EBITDA.

What is a good EBITDA?

An EBITDA with a 10% or more margin is generally good. This can be understood better with the help of an illustration;

While considering two different companies, namely Company A and Company B, with their EBITDA of $600,000, total revenue of $6,000,000, and an EBITDA of $ 750,000 and total revenue of $9,000,000, respectively. And this indicates that B company demonstrates a higher EBITDA than A company. (8% against 10%). And looking at this data, company B might appear more promising to a potential investor.

FORMULA AND CALCULATION

Usually, two formulas are there for the calculation i.e;

 EBITDA = Net income + Taxes + Interest expense + Depreciation & Amortization

Or

EBITDA = Operating Income + Depreciation & Amortization

It is thus estimated by straight forward method. Simply by considering the information provided in the company’s income statement and balance sheet. The first formula uses the net income to calculate EBITDA by adding back interest and tax expenses. In the second formula to obtain operating income, subtract daily operating expenses. This method helps investors to get an idea about the exact earnings of the company by excluding interest and taxes. But it should note that the calculations via two different formulas will provide you with two different results. Net income includes line items that don’t include in operating income, such as non-operating income or one time-expenses.

USE CASES :

• EBITDA represents the cash flow and gives a quick overview of the total value of a company. Thereby helping the investors to understand whether a company is making a profit or not. Moreover, most private equity firms use these metrics to compare similar companies in a particular industry to understand a company’s performance compared to its competitors.

• EBITDA is commonly used in valuation and helps stakeholders, especially investors, understand whether a company is overvalued or undervalued. And such comparisons are essential as different industries exhibit different average ratios. It also reveals the operating profitability of the business. Thus, EBITDA helps investors know the company’s net income even before interest, taxes, or depreciation is accounted for. 

• In some cases, EBITDA is very similar to the PE ratio (Price-to-Earnings). But compared to the PE ratio, EBITDA is neutral to capital structure and lowers the risk factors associated with capital investments and other financing variables.

• EBITDA is often used in financial modeling to calculate un-levered free cash flow.

EBITDA MARGIN AND HOW TO INTERPRET IT?

The EBITDA margin is a profitability ratio that measures a company’s earnings before interest, tax, depreciation, and amortization as a percentage of its total revenue. And there are mainly two types of EBITDA-1. Higher margin and 2. Lower margin. Comparatively, a higher margin is more favourable because companies with higher value margins produce a higher profit. 

• Higher EBITDA margin: Higher EBITDA margin is considered more favorable because companies with higher EBITDA margins are producing a higher amount of profit. 

•Lower margin: Lower margin implies the presence of an underlying weakness in the company’s business model, like ineffectiveness in sales & marketing, targeting the wrong market, etc.

STEPS TO CALCULATE THE EBIDTA MARGIN

Follow the steps given below to arrive at the EBITDA margin;

  1. To begin with, the revenue, gather the cost of goods sold (COGS), and operating expense from the income statement.
  2. Then consider the depreciation and amortization (D&A) from the cash flow statement and any other non-cash add-backs. 
  3. Determine the operating income by subtracting COGS and operating expenses and adding back D & A.
  4. Finally, divide the value by the corresponding revenue figure, and the resulting figure is your EBITDA margin for each company.

WHY IS IT IMPORTANT TO CALCULATE THE EBITDA MARGIN?

Calculating this margin helps companies to;

• Compare against its historical results, i.e., the previous model’s profitability trends.

• It helps to compare a company’s performance with competitors in similar industries or relatively similar industries.

IS EBITDA THE SAME AS GROSS PROFIT?

Gross profit and EBITDA are not the same. Gross profit denotes the amount of profit a company makes after subtracting the cost associated with making its product or offering its services to its customers. In contrast, it shows a company’s profitability after deducting interest, taxes, depreciation, and amortization. Thus EBITDA and gross profit are not the same since it measures the company’s profitability by exempting different items or cost.

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What is a Business Plan Template?

A business plan template is a standardized document that helps a business planner to write a detailed business plan. A viable business plan must cover the following topics: introduction, executive summary, company description, and marketing plan. Also a business planner can use a good business plan template to create a well-organized business plan as per the client’s requirement.

A good business plan template must have the following ten key elements;

Executive summary

Company overview

Industry analysis

Customer analysis

Competitive analysis

Marketing plan

Operations plan

Management team

Financial plan

Appendix

A well-designed templates for business plan helps to articulate a strategy for starting a business and to pitch the right kind of investors. It also shows the clients that we spend considerable time thinking about the potential issues the business might face. Also ask them detailed questions surrounding economics and fundamentals of the client’s business model to provide valuable suggestions and feedbacks. Thus it’s understood that a well-written business plan is critical for any startup in the event of fundraising.

 While writing a one-pager is almost a layman’s cup of tea, but when it comes to technical writing, it requires deeper knowledge about the subject and needs to follow a specific writing format. A good content writer must essentially be a good wordsmith. Content writing is definitely not a layman thing; it demands good writing skills to achieve required goals. This serves to influence the target audience. While understanding them is essential for all types of writing, but it is different when it comes to technical writing. Influencing the target audience is never an easy task because knowing your audience determines what information you present, how you present it, and also how you structure your entire writing.

The possible audience for a business plan might be micro Venture Capitalists and HNIs (High net-worth individuals). Currently, start ups are highly in need of well organized technical wordsmiths for them to pitch the kind of investors. And Scaalex, as a team of highly driven domain experts, takes no chance to compromise on the quality of our output. Till now we have closely worked with 270+ start ups by helping them in the event of fundraising. As domain experts, we stand out for in depth market research, thereby helping the new entrepreneurs in designing a good business plan. If you think you are one among the start ups who lack enough market data, we are here to attain you with exceptional execution and fundraising results.

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What is Business Plan

A business plan is a standardized written document outlining the company’s organizational, financial, and operating framework. A good business plan gives potential investors the right insights into the company’s current state. Also an idea of how it becomes an investment opportunity in the future. It is a prerequisite for any startup to begin with and to attract more investors. In short, a business plan conveys the company’s goals, both short-term and long-term.

Planning helps to strategize, find problems and the competition of an organization, and ways to overcome them too. Moreover, it includes overall structure, marketing and positioning strategy, and fund required by the company for the long run.

For most startups, it serves as a dual-purpose document used internally and externally.

Importance:

  • To set KPIs and benchmarks: Having a good plan helps the company frame its goals and benchmarks more precisely by aligning with its long-term vision and strategy.
  • Decision Making: A viable plan helps entrepreneurs to make critical decisions regarding its core strategies and helps them understand how those decisions will impact the overall business.
  • Roadmap Planning: A good business plan describes what the business intends to be doing over time through a detailed description of the customer, market, competitors, and current and future strategies.
  • Funding: Prospective investors and banks require the startups to prepare a detailed business plan for them to understand and decide whether the business has the potential to earn profits in the long run or not.
  • Partnership and alliances: It also helps in the smooth execution of the planned business models and enters into collaboration with the desired partners by explaining to them the roles and future vision of the company.

The Major Types

  • Standard Business Plan: Standard business plan covers details like the mission, vision, financial statistics, and target audience, which is usually comprehensible for all parties like product vendors, VCs and investors, finance firms or even internal business members. One of the actual merits of this kind of business plan is that it describes the expenses in detail along with the information regarding profit and loss, cash flow, and projected balance sheet.
  • Growth Business Plan: A growth plan gives insights into the proposed strategy, execution mechanism, various parameters, and metrics to aid assessment and the necessary statistics and numbers. A well-defined strategy finds solutions to the identified problem, the target audience, and how to approach them. Whereas an execution plan states the methodology to implement the strategy by elaborating each step of the process in detail. Metrics measure the current performance against the set benchmarks. Finally, the plan also includes reliable statistics, charts, and tables to convince investors of the projected growth.
  • Lean Business Plan: Lean plan is an optimized version of a standardized business plan and shares similarities with a growth plan.
  • Strategy: This phase states what the company wants to achieve and how it will achieve it. Working in line with sound strategy helps the management from unnecessary waste of time and effort.
  • Tactics: Tactics are measures taken to make the strategy result in maximum efficiency.
  • Assumptions, metrics and schedule: Assumptions without benchmarks are meaningless. And benchmark comes through the use of established milestones and metrics. Further, to ensure that things go as planned, it’s essential to follow the proper schedule.
  • Forecast: Financial forecast relating to sales, revenue and expenditures must be entirely accurate. And making basic predictions plays a crucial role in adding credibility to the business plan.
  • Reviewing: Once the business plan is completed, quality time be invested in reviewing the documents. There should be 3-4 rounds of iterations required to increase the efficiency of the business plan.
  • Internal Business Plan: Internal plan is similar to a lean strategy, but it delivers results within the organization. It is not made available to investors or any other external entity; it is specific to the employees.
  • Feasibility Business Plan: As the name suggests, it determines whether the proposed product or service will be feasible or not in the future. It also determines the potential investors, intended demographics, and the recommendations required for the business to be ongoing.
  • OnePage Business Plan: A one-page business plan will be concise, defining the milestones, objectives, and actual numbers summarised within a page.
  • Strategic Business Plan: The strategic plan overlooks the financial description and focuses more on the strategy and tactics to achieve the objectives.
  • Contingency Business Plan: The contingency plan details the alternate course of action if the primary strategy fails because the probability of facing a loss is the same, just as the chance of being profitable.
  • Startup Business Plan: Often considered as a version of the lean plan, a startup plan is prepared by new businesses to attract VCs and investors.

Essentials of a Good Business Plan

It is essential for attracting investors and fundraising. It also helps companies articulate their mission and vision and plot their growth trajectory. As such, it cannot be just a bulleted list. The plan needs to be a serious business document with the following size elements:

  • Executive summary: Executive summary should contain a brief overview of the entire business plan. This section is critical in a business plan because it decides whether the stakeholders will continue reading the project or not. It gives a brief overview of the business idea, the target market, goals, competition, USP, the overall team, and the financial outlook for the business.
  • Company Description & Synopsis: This part of the business plan explains the company’s mission, philosophy, goals, industry and legal structure, USP, i.e. the problem the company is solving for its customers and the solution which makes it stand out from the competition.
  • Market Overview: This section explains the current market scenario of the whole industry, covering aspects like the size of the market, trends, customer’s needs, competitor details Etc. with reliable facts and figures needed to substantiate the overall market scenario.
  • Customer Analysis: Customer analysis gives details regarding customers like customer demographics, geographics, psychographics, needs, wants, desires and buying habits Etc.
  • Product/Service Overview: This section gives a detailed overview of the product and services offered by the company.
  • Business Model: The business model gives an overview of how the company approaches the market and how the approach is viable.
  • Revenue Model: It explains how the company is planning to make revenue through its business model by stating the expenses and revenue sources.
  • Competitive Analysis: It explains who the competitors and their USPs and the strategies used by the company to tackle the competition.
  • Marketing Plan: This part explains how the company uses the above details in formulating and executing the marketing strategies. This part is crucial since it describes how the company plans to reach out to its customers and stand out from the competitors.
  • Management Team: Gives details of all board members, their qualifications, experience, and designations.
  • Funding & financials: It is the final and essential part of a business plan, especially for startups, since it states the cost of the execution of the business plan. It also includes all short-term and long-term financial requirements, funding goals, and how the investors can help the company achieve them.

How does Scaalex come into the picture?

Most startups fail to raise funds from investors. This is because of the lack of knowledge on how to execute the financial models. Further, they have to struggle without proper market research, financial plan, model, and so on.

Scaalex is a team of top domain experts and financial consultants. We closely worked with 270+ startups to build financial projections, valuation report, business plans, and funding advisory. We stand for an expert team with in-depth market search and also understand the expectations of new entrepreneurs. If you are one among the startups who lack adequate financial insights; reach out to us to attain exceptional execution and fundraising results!

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Related Blog: Tips to Improve Your Business Plan