EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization
What is EBITDA & why is it important for private equity companies?
EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) is a good measure of core profit and a good indicator of a company’s operating performance. Essentially, it is between gross and net profit. Why is EBITDA reporting important for private equity? It removes (adds back) one-time expenses that you may have on your income statement annually. Typically, this is used for private equity companies or companies that have a board to which they provide earnings reports. EBITDA report is used frequently in companies that have multiple subsidiaries under a parent corporate umbrella.
EBITDA can be also be utilized by investors to measure long term growth and cash flow. Investors can use this information and data to compare two companies and their growth potentials. The reporting is specifically beneficial when comparing financials of companies in different industries, etc.
Lastly, these reports are used sometimes by banks who will be lending a company funds. This allows banks to get a quick snapshot of profitability and cash flow.
In Netsuite, we have the ability to keep up with a company’s GAAP Reporting for taxes and also write reports in order to capture the company’s EBITDA for their investors.
*Legally, you do not have to disclose EBITDA, (Not required by GAAP)*
3 Methods for EBITDA Reporting with Netsuite
1. Dimension Method
In the Dimension Method of EBITDA reporting in Netsuite, you must use a native Netsuite Dimension such as a department, class or even location. This method does not require adjustments at the end of the period, and you are able to maintain a single accounting book. You do not need to maintain and primary and secondary accounting book.
2. Account Method
In the Account method you will make an adjusting journal entry at the end of the period. The adjustment account appears in a different section of your financials. You will have an adjustment account for each section you would need to adjust due to EBITDA. This method allows you to maintain only one accounting book and your primary accounts will grow.
3. Multi-Book Accounting Method
The Multi-Book Accounting method uses the approach of making adjustments at the end of the period. Your accounts are book specific and the original entry is kept in the primary book. This method allows you to create budgets or forecasts (Pro Forma) from the adjustment books. You are also able to compare your primary and secondary books.
*All methods require a slight customization to your reports.
For more information on EBITDA for private equity companies, join us for a deep-dive and demonstration into the three methods of EBITDA reporting with NetSuite.