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EBIT stands for “Earnings Before Interest and Taxes” and is a measure of your company’s profitability — simply put, it is revenue minus expenses before paying interest on debt and taxes to the government. You’ve probably also seen EBITDA, which adds depreciation and amortization to interest and taxes. Gross profit (aka revenue minus expenses) is something we look at all the time (without using the EBIT term), and it gives you the earnings from your core business activities. EBIT is a useful metric for investors and analysts to assess a company’s financial health and profitability.
If your numbers aren’t where you want them to be, there are several ways your company can improve:
- Compare performance: By tracking EBIT over time, business owners can compare their performance to previous periods and see if the business is becoming more or less profitable — this is usually a lagging indicator of increasing costs and possibly the existence of hidden costs.
- Benchmark against industry peers: If you have a peer that is publicly traded or otherwise discloses their financials for one reason or another, then you can use EBIT to benchmark your performance against theirs. This can help you identify areas where you might be underperforming and develop strategies to improve profitability.
- Increase revenue: A company can increase its revenue by improving its sales and marketing efforts, expanding a product line, or entering new markets. Looking for lost and missed opportunities is a big part of this.
- Reduce costs: A company can reduce its costs by improving its supply chain efficiency, negotiating better prices with suppliers, or cutting unnecessary expenses. Some things might be harder to quantify, and we found a great resource to help you get in the ‘measurement mindset.’
- Improve pricing: A company can improve its pricing by increasing prices for its products or services, or by offering premium products or services that command higher prices. We also wrote a post about when you have low-margin customers and evaluating whether it’s time to review their pricing structure. Raising prices is something to be carefully considered —including change management with your customers — because it impacts the supply/demand ratio and could ultimately hurt your business.
- Increase productivity: A company can increase its productivity by improving its production processes, investing in technology and automation, or by better utilizing its workforce.
- Sell non-core assets: A company can sell non-core assets, such as real estate or unused equipment, to generate additional cash flow and improve EBIT. Companies should be conducting regular asset reviews to stay ahead of this, but it’s always worth it if you’re starting to see decreased profitability.
- Restructure debt: A company can restructure its debt and business owners shouldn’t be shy about working with creditors to improve their debt position. Working with an accountant or finance professional professional is a must here.
- Evaluate investments: Same thing with investments. Use EBIT to evaluate the potential profitability of new investments or expansion opportunities. By comparing the expected EBIT from a new investment to the existing EBIT, business owners can make informed decisions about whether to pursue the investment.
By using EBIT effectively, small business owners can gain insights into their financial health and make informed decisions that can lead to increased profitability and long-term success.
