If you own a dental practice, the time will come when you encounter the acronym EBITDA. When you come across it, you’ll know it’s an important metric. Mostly because it’s used in financial circles regarding your practice’s value.
But what does it mean? What affects EBITDA? How does it affect potential investments or sales? Once you understand the basics of EBITDA, its implications will become immediately apparent.
That’s because EBITDA may be one of the very best metrics to determine the market value of your dental practice. With a good EBITDA, Dental Practices can more easily attract investors and command a better sale price. Let’s look at what EBITDA is, as well as how such a simple score can have such big ramifications.
What is EBITDA?
Pronounced “ee-bit-dah,” EBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. To clarify, it’s your earnings before those four money draining items are added back in. It’s not a generally accepted accounting principle (GAAP), but it’s a valuable calculation nonetheless, particularly when we are seeking investors or buyers for our businesses.
EBITDA is a widely used metric that gives us a good picture of a company’s core profitability. Since interest, taxes, depreciation, and amortization are out of a business owner’s control, EBITDA provides insight into the company’s operations. It also gives investors or buyers a clearer picture of profitability potential down the road.
We use other popular metrics to measure a company’s income and profitability as well. Revenue and gross margin for instance. But there is a difference between EBITDA and revenue, and also between EBITDA and gross margin. Here’s how the terms differ.
EBITDA vs Revenue
At first glance, EBITDA and revenue may look similar, but they are quite different. Revenue measures your practice’s sales, while EBITDA measures its profitability. Revenue calculates the total income from all your business operations. EBITDA takes much more into account. It removes the inescapable expenses from revenue. This leaves us with the actual cash flow a company is working with.
Gross Margin vs EBITDA
Another metric business owners use to determine the profitability of a business is gross margin. It too takes into account your income and some costs, but at a much more basic level. The calculation is as simple as revenue minus cost of goods sold. That’s it. It doesn’t take into account indirect expenses like taxes, interest, and the depreciation of company assets.
Since it’s a common source for confusion, let’s take a moment to look at amortization. When they first encounter the concept of EBITDA, dental practice owners sometimes have a little trouble understanding amortization. When amortization refers to a loan, it refers to the process of paying the loan over time. But the term is used a little differently in the context of EBITDA.
In EBITDA calculations, amortization typically refers to intangible assets. When amortization refers to an asset, it refers to the depreciation of that asset’s value over time. For instance, if a business has a patent with an expiration date, the IP is worth a little less each year. The same might be true for continuing education programs business owners cover for employees. Taking the decreasing value of that intangible asset into account in your books gives you a clearer picture of profitability.
Why EBITDA is Important
When we look at a business’s financials, there are some key things we want to see. First off, how profitable is the company? Bringing in money is one thing, but if costs are too high, our cash flow may not reflect our revenue.
Another thing we want to see is what we can expect down the road. Knowing these numbers helps us make important decisions regarding the business. They also give us tremendous curb appeal when it comes time to sell. Here are some of the key things we get out of EBITDA.
What is EBITDA Margin?
The EBITDA number is one thing, but the margin is another. An EBITDA margin is calculated by dividing your EBITDA by your total revenue.
What’s a Good EBITDA Margin?
If we want to get a good price when we sell our practices, having a good EBITDA margin is important. It’s also an important part of attracting investors, so focusing on a good margin is crucial. What is a good EBITDA? Let’s take a look.
How good or bad an EBITDA margin is considered to be is up for debate. As a general rule of thumb, an EBITDA margin of 10% or higher is considered good in most industries. Although, the average EBITDA for dental practices is closer to 19% over the past six years. The higher your EBITDA, the better.
A 20% EBITDA Dental Practice vs A 40% EBITDA Dental Practice
Let’s say you were looking for an investor or buyer and wanted to know how different margins affected the transaction. So, what does EBITDA margin tell you?
Depending upon your particular EBITDA, dental practice valuation can vary.
How to Boost EBITDA in Your Practice
When it comes to boosting EBITDA, dental practice owners and managers often don’t know where to start. If it were easy to run a more profitable business, wouldn’t we all be doing it? Well, there are some great ways to boost your EBITDA that are certainly doable.
The most obvious way to increase profitability is to increase revenue. Easier said than done, but a methodical approach can have you making incremental improvements in no time. In order to increase your revenue, focus on things you can do in house.
- Up your advertising game to attract new patients.
- Consider offering telehealth visits to bring them in the door.
- Sell new services to your existing patients.
- Expand your practice by picking up the unit next door or adding a second location.
Another popular way to boost cash reserves is to cut costs. It can get a bad rap since it can involve giving some things up. But cutting costs can go a long way toward boosting your EBITDA.
When cutting costs, make sure it doesn’t affect the quality of your products and services. If going with a cheaper product means going with an inferior product, it may not be worth the cost savings.
Shop Around for Lower Prices
You don’t always have to change products or vendors at all to cut your costs. Many vendors are willing to lower prices for good customers. Even if it takes talking to different vendors to find a lower price, current vendors may be willing to match.
Sometimes they can’t go any lower on your current orders. But what about buying in bulk? If it’s something you use a lot and has a long shelf life, buying bulk may result in lower prices.
Maintain the Costs of Your Services
Retailers discount products to clear space on their shelves, but this approach doesn’t work as well in other industries. A better approach is to maintain the costs of services while cutting costs and finding ways to generate more revenue. For instance, finding vendors with better pricing allows you to make more money without raising prices.
Automate Tedious Tasks
A great way to cut costs and save money is to automate some of your more tedious daily tasks. When we have employees spending inordinate amounts of time on things that don’t make money, it affects the bottom line. By automating these tasks, we free up employees to focus on more lucrative tasks. You can easily automate many of these tasks with software programs or virtual assistants.
Better Inventory Management
Another way to control your EBITDA margin is to better manage inventory. You spend big money on supplies for operating your dental practice, and any losses hit twice as hard. Not only are you not making money on the supplies you already have, but you spend money to replace them. This decreases your working capital and lowers your EBITDA margin. Focusing on inventory management can have surprisingly large effects on the bottom line.
Don’t Sleep on EBITDA
EBITDA is an important metric in any business, and EBITDA in dentistry is no different. Paying attention to this simple calculation can set you up for financial success in the future. When it comes time to exit your practice, its profitability can make or break your retirement plans.
If you’re new to EBITDA, it can be helpful to have an EBITDA analysis conducted by professionals. Not only can they help fine tune your calculation, but they can point you to where you are losing money. When it comes to EBITDA, dental practice owners can’t afford to brush it aside. The sooner you learn your practice’s true value, the sooner you can make profitable changes to boost earnings even further.