Indicators play a totally vital role in the control of a enterprise. That is why information what EBITDA is and a way to calculate it is incredibly vital. This financial indicator, being of such importance, has no exception inside the measurement area of groups’ financial fitness.

Besides knowing what EBITDA is, you also need to recognise what it is for and the way to use it on your making plans. Thus, you will have extra statistics approximately the enterprise and you will be able to make more strategic management choices.

Do you want to recognise what EBITDA is, the way to calculate it, and why this economic indicator is essential for your business enterprise? Continue reading this post!

What is operating profit for?

Operating profit or EBITDA is an indicator used to measure the financial performance of a business. When used by managers, it is possible to identify the company’s ability to pay for its operations and generate cash flow   .

As you have seen, EBITDA does not consider data related to interest, taxes, depreciation and amortization from the analysis. This is because, even if these costs are relevant or impact the business figures, they are not part of the company’s direct activities.

Therefore, the most important function of EBITDA is to reveal the company’s ability to generate positive responses from its direct operations. It can reveal a business’ ability to generate profit, without considering information that does not interfere with this.

For this reason, in addition to business management, EBITDA is widely used to measure the performance of businesses with shares on the stock exchange. Many investors use this calculation to compare the profitability and efficiency of competing companies.

When a business has a positive EBITDA, it is a sign that it is well managed and is making a profit from its core operations. However, if the indicator is negative, this could be a warning sign. To have a clearer view and make better decisions, it is worth evaluating other company indicators.

How important is this financial indicator for your company?

You have already learned that calculating EBITDA allows you to assess whether your company is efficient and profitable. It shows the company’s ability to pay expenses and generate cash in the future. This is also a relevant indicator for checking the performance of businesses with debt.

After all, EBITDA can show that a company in debt may have a high level of ability to make a profit in the future, when its finances are in order, for example. Therefore, calculating EBITDA allows a business manager to identify threats and project its cash flow.

The EBITDA of businesses in the same segment is also crucial to evaluate. Thus, the entrepreneur will be able to compare the performance of his business with that of his competitors. In this way, it will be possible to understand the position of his company in the market.

How is EBITDA calculated?

So you now know what EBITDA is, why it matters, and how important it is. Next, you should learn how to calculate this number so you could apply it on making choices.

The EBITDA calculation follows the following formula:

EBITDA = net operating profit + depreciation + amortization

Therefore, to calculate your company’s EBITDA, you need to find the net operating profit. This is the net income minus the expenses that companies have with their activities and the costs of the goods they trade.

This is a very important calculation for the company — as it is usually declared in the income statement (DRE). This report presents the main activities of the business and reveals central business figures.

To find the net operating profit, you need to calculate this indicator and then add it to the account. The formula is as follows:

Net operating profit = Net sales revenue – Cost of goods sold – Operating expenses

But be careful when interpreting the data. Since EBITDA disregards some important information, it cannot be the only indicator used in the analysis. Although it serves to obtain specific data, the indicator does not consider the company’s entire financial situation.

In this case, it is also valid to base yourself on other indicators — including those that consider taxes, debts and investments. With a more complete analysis, it will be possible to draw better conclusions to support business decisions.

What is excluded in the EBITDA calculation?

Although they are part of the business result, loans, tax discounts, interest payments or investment profitability are removed from the EBITDA calculation. But do you know why they are excluded from the formula?

The reason is the importance of knowing exactly how the company’s final activities are in relation to its main operations. When considering the profitability of investments, for example, the production deficiency that the business is determined to execute can be hidden.

Therefore, analyzing the EBITDA calculation allows us to directly understand the efficiency linked to business activities. This provides essential data for planning changes or maintaining processes in the company.

Although it is often discussed in relation to large companies, EBITDA is also essential for micro and small businesses. After all, you need to understand whether your business is achieving good results from the sales of its products and services.

Knowing a company’s financial indicators is essential to understanding its current situation and facilitating decision-making. In this sense, knowing how to calculate gross and net revenue is crucial for managers.

Knowing about them allows you to visualize the financial health of the business and understand the results it has achieved. At the same time, it is important to note that there are significant differences between both concepts.

Read this article to understand what gross and net revenue are, the differences between them and how to calculate them in your company!

What is gross revenue?

Gross revenue represents the total financial amount that entered a company’s accounts from the marketing of its products and services over a given period.

It is linked to the organization’s core business and must be included in the income statement (DRE). Therefore, gross revenue represents the revenue obtained by the organization in the period analyzed.

Because of this, gross revenue is a relevant concept for evaluating a company’s finances. After all, it shows the amount of resources that are entering the cash register and whether current efforts have generated the expected returns.

Furthermore, gross revenue is calculated based on predetermined intervals — such as monthly, quarterly or half-yearly. In this way, the comparison between the information can be used to identify opportunities and risks for the company, such as those related to the seasonality of sales .

What is net income?

Net revenue, on the other hand, includes the resources that actually belong to the company. This is because they are calculated by applying deductions to gross revenue to find the company’s “clean” amount in a given period.

There are several deductions that affect the amount. In relation to taxes , the main ones are:

• Social Integration Program (PIS) : tax used to raise funds to finance unemployment insurance, benefits and participation in the revenue of agencies;
• Tax on the Circulation of Goods and Services (ICMS) : applied in the states on the transportation of goods and certain services;
• Contribution for Social Security Financing (COFINS) : is federal in nature and serves to finance Brazilian social security.

Taxes like these are levied on companies’ revenues — that is, on their gross income. In this way, they reduce the amount of money that will be available to businesses after the sale of their products and services.

In addition to taxes, other factors impact an organization’s revenue. There are aspects such as customer returns and discounted sales. Therefore, these should also be included in the calculation of net revenue.

What is the difference between them?

Now that you understand the concepts of gross and net revenue, it is worth knowing the differences between the two. While gross revenue considers what came into the cash register from the company’s core business, net revenue only calculates what was available to the organization.

As you can see, there is no way to know what the company’s net revenue was over a given period without first knowing its total revenue.

Furthermore, another difference between them is the information that can be generated for decision-making. For example, gross revenue can be used to visualize the company’s sales efforts.

When it is high, it can be a sign that work is on the right track. When the number is low, managers can understand that it is time to adopt new approaches in planning.

In turn, net revenue generates information that relates to the period after that moment. That is, when gross revenue is high and net revenue is low, there is an indication that there were many discounts on the company’s revenue. Therefore, it may be interesting to find out the reasons for the low performance.

If net revenue is lower due to high discounts, managers can think of new logics for pricing services, for example. Therefore, both concepts generate different insights for company planning.

How important are the two concepts in the company?

As you have seen, there are significant differences between the concepts of gross and net revenue. However, both are valuable elements for the company’s financial and accounting management.

Decision-making, for example, is a process made easier by understanding the two concepts. As you already know, knowledge about each one can provide specific insights into the organization’s needs.

Furthermore, gross and net revenue are important indicators for attracting investors to the company. This is because they evaluate the financial elements of the organization before making transactions with it — both on the stock exchange and outside of this environment.

How to calculate them in the company?

So far, you’ve learned the main elements of a company’s gross and net revenue. Now it’s time to learn how to calculate each of them.

Check it out!

How to calculate gross revenue

The first value to be calculated is gross revenue, since net revenue depends on this number. The formula is:

Gross revenue = Volume of products or services sold x Unit value

In other words, to find it, you need to know what the company’s sales were during the period and the price of each product. Multiplying the numbers will show the total amount that entered the cash register — or its revenue.

How to calculate net income

Once you have identified your gross revenue, you can calculate your net revenue. The formula will be:

Net Revenue = Gross Revenue – Deductions

Then, separate all the deductions that will affect the company’s revenue. Consider taxes, discounts applied at the time of sale, returned products and other discounts.

This way, you will be able to see how much money is left after all the discounts. To get the most out of both numbers, compare their evolution over the periods to identify trends, opportunities and risks.

What is net profit?

Net earnings is a monetary indicator that pertains to the coins generation as a consequence of the operation of a commercial enterprise. It is received from the difference among the organization’s total sales (the whole thing it received) and its general prices.

In this way, net profit analyzes everything that the business actually earned. In other words, what money is left for the company , after deductions for expenses, costs to maintain the operation and taxes.

Costs are all direct expenses related to the production of the business , such as the salaries of production employees and the costs of raw materials. Expenses are all other expenses that are not directly linked to the services or products offered, such as electricity bills, internet, commissions, etc.

How important is this indicator for my business?

You’ve already seen that net income is vital for analyzing the financial fitness or fulfillment of a commercial enterprise. This indicator lets in you to realize how your money owed are doing and makes it simpler to decide, for instance, on investments for business growth.

A good net profit also helps to maintain a positive cash flow . After all, the data allows you to see whether the company is making enough profit to maintain or grow. On the contrary, if it is experiencing losses or constant reductions in profit, it may mean that its management is not appropriate.

Given this result, you can reorganize your business’ finances and make more strategic decisions. If you notice negative performance, one solution may be to reduce costs and expenses or change the prices of your services and products .

Knowing your profit, you can still build an emergency fund or plan improvements for your business. Hiring more employees, purchasing new products or renovating your business are some possibilities.

With a good level of profit, there is more financial organization and there is no need to resort to loans. Your company will also have greater security in times of crisis. That is why it is so important that the net profit of your business is calculated and managed correctly.

How to calculate net profit?

To correctly calculate net profit, all fixed and variable expenses must be identified. In practice, the formula is described as follows:

Net Profit = Total Revenue – Costs – Expenses (fixed and variable)

So, to calculate this, you must take the total revenue (monthly income) and subtract the costs and expenses (fixed and variable). Examples of expenses and costs of a company’s operations are:

• employee salary;
• commissions;
• payment of suppliers;
• rent;
• raw material costs;
• insurance;
• taxes;
• energy, cell phone, internet, water bills, etc.;
• employee benefits;
• credit card fees;
• partners’ pro-labore;
• marketing;

Although the calculation is not complicated, there is a lot of information considered in the formula. Therefore, it is necessary to regularly monitor your cash flow to help analyze the identifier.

With this care, you will be able to better manage your company’s finances and make effective decisions. One tip to help with this process is to rely on technology, using a system to facilitate financial control.

How to interpret the results obtained from this indicator?

Now you know how to calculate net profit and how important it is for managing your business. But how do you interpret the result? First, you need to make sure you are using reliable data in the formula.

It is necessary to record and control all movements in your cash flow, as this is the only way to obtain accurate results. Otherwise, the net profit result will not be realistic, which could cause numerous problems for management.

Keep in mind that making decisions based on false results can lead to wrong choices. For example, the company could appear to have a healthy budget when, in reality, it is running at a loss. This flaw in the analysis would affect management and could cause problems for the business.

In addition to using reliable data, you must know how to interpret the results obtained from the calculation. To do this, it is worth considering the entire context, such as the current market situation, results from other periods, internal changes, among other factors.

From this, you will be able to analyze the net profit in a broader way to draw conclusions about the results. In this process, it is valid to use other financial indicators of prices, revenue, debts, etc.

Do you understand what the smash-even factor is? It is a easy calculation which could substantially make a contribution to financial planning and to figuring out the health of a commercial enterprise. However, no longer all entrepreneurs are acquainted with the concept or recognize a way to practice it.

It is critical to maintain in thoughts that any business have to try to maintain manage of its price range, be prepared and recognize exactly what the income goal is. And all of these techniques can benefit from this calculation!

But what is the damage-even factor? Continue analyzing to recognize the which means of this indicator, as well as the way to calculate it and how the result impacts budget. Check it out!

What is the break-even point?

The term refers to a mathematical calculation that identifies how much a company needs to sell in order to avoid losses from its operations. Reaching this level means that all capital inflows are sufficient to cover outflows, including taxes and other expenses.

In other words, the indicator assumes that the company’s profit is zero. If the business reaches this balance, it means that it is able to pay for itself. When it exceeds the indicator, revenues exceed costs and there is a profit.

In this sense, the break-even point is variable, since each company has its own production costs and specific expenses. For this reason, you must learn how to calculate it correctly.

It is worth noting that there are different types of break-even point. Although the most common is the so-called accounting one , there are also financial and economic ones .

Understand the differences between them!

Accounting breakeven point

It identifies the amount of revenue needed for the company to cover all its expenses. This calculation is valuable for finding out whether the company is generating profits.

Financial breakeven point

The difference with the financial calculation is that this does not consider losses such as amortization, depletion and depreciation, even though these factors can reduce profit. This is because there are managements that include these items as costs inherent to the enterprise.

Economic breakeven point

Unlike the financial model, the economic model considers elements such as amortization, depletion and depreciation. It also includes the opportunity cost in the calculations. For this reason, it is considered the most complete calculation among the three.

How important is this indicator in business management?

Now that you know what it is, you’ve probably realized how important it can be for business management and financial planning .

After all, it is from this calculation that the manager finds out whether the company is making a profit and what the minimum quantity of products that need to be sold is to avoid losses.

Furthermore, it is an essential indicator for budget planning. This is because it can be used in financial projections. If you are looking for investors, this can be a crucial factor in obtaining the desired resources.

What’s more, the break-even point can be used as an indicator to organize sales targets. For example, if it is necessary to sell 500 units of the product just to pay off debts, it is possible to establish realistic targets for the salespeople.

Another important insight provided by this calculation is that it allows you to identify which products are selling the most and the least. This way, you will be able to better organize your product pipeline and focus your efforts on selling certain items over others.

Finally, by integrating the financial break-even point with technological solution, it is possible to have better control and monitoring of sales, revenue, expenses and finances in general.

Which formula to use?

After understanding its importance, it remains to know the formula to perform the calculation. It works like this:

Break-even Point = (Fixed Cost / Revenue – Variable Cost) x contribution margin.

To understand this in practice, consider an example. Imagine a company that sells T-shirts at a price of R$20 per unit. The cost of fixed expenses, such as salaries and rent, is R$3,000 and the cost of variable expenses, such as raw materials, is R$10 per unit.

In this example, the contribution margin is R$10 (R$20 of revenue – minus R$10 of fixed and variable expenses). Then, to obtain the break-even point, simply do the following calculation:

Breakeven Point = (3000 / 20 – 10) x 10

Breakeven Point = 3000

This means that the company will need to sell 3,000 units of t-shirts to break even and avoid losses. Therefore, this calculation makes it easier to plan and make decisions in the business, aiming to ensure profit and continued sales.

How do I interpret the result of this indicator for my company?

As you saw in the practical example, through calculation it is possible to find out the minimum quantity of products that need to be sold. This is a way to have more security so as not to end the month in the red.

But to do this, you need to know how to interpret the indicator’s result. In this sense, consider that the lower the result of the calculation, the better the company’s situation. This is because the break-even point would show that fewer products need to be sold to cover costs.

And in addition to indicating the minimum quantity of products to be sold, it also allows you to have an idea of ​​how many sales need to be made in order to make a profit.

In addition, there are other points of attention that you should consider in your interpretation. Among them:

• the break-even point is calculated according to sales projections;
• the lower the result, the lower the risks involved in the business;
• the lower the result, the higher the company’s costs with variable expenses compared to fixed expenses and costs.