Unlocking Profit Potential: How to Calculate EBITDA and Use it to Power Your Practice
Unlocking Profit Potential: How to Calculate EBITDA and Use it to Power Your Practice
EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization, is a key financial metric used to evaluate the profitability of a veterinary practice. It essentially shows how much profit a practice generates from its core operations, excluding expenses related to financing, taxes, and non-cash depreciation and amortization charges. For veterinary practice owners, understanding EBITDA is critical because it provides a clearer picture of operating efficiency and profitability, which are important when assessing the financial health of the business or preparing it for sale.
For a simplified way to calculate EBITDA (without engaging your accountant), use this top-down formula to get a pretty good idea:
EBITDA = Gross Revenue – Expenses*
*Expenses includes costs of goods sold, payroll, payroll taxes, payroll benefits, facility and equipment repair and maintenance costs, general and administration costs, marketing, and bank fees.
Alternatively, use this bottom-up formula starting with Net Income (also called Profit After Taxes):
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
To get your EBITDA percent:
EBITDA Percent = EBITDA ÷ Gross Revenue x 100
A healthy EBITDA percent is around 12%. Many practices hover around 5% to 8%, which means they are operating at or near breakeven, or possibly at a loss.
Tracking EBITDA regularly allows you to monitor business performance and compare it with industry standards. A healthy EBITDA can improve cash flow and significantly increase the value of your practice, which is crucial for those looking to sell or attract investors. Practices aiming to enhance their EBITDA should focus on both increasing revenue and reducing operational costs. Overall, EBITDA provides a valuable benchmark for guiding strategic decisions and long-term growth.
“[On the importance of EBITDA in practice sales and valuations, see our companion article: Understanding EBITDA: The Key to Maximizing Your Veterinary Practice’s Value]”
