Growing profit, i.e., Ebitda, is the easiest way to add value to an organization. But what does that mean? And how does one go about growing Ebitda?
Let’s begin by discussing what Ebitda is and then get into how to grow it.
Table of contents
- What is Ebitda, and why does it matter?
- How to grow Ebitda
- Put these together and see a growing Ebitda and profit
What is Ebitda, and why does it matter?
Ebitda is an accounting term that explicitly stands for “Earnings before interest, taxes, depreciation, and amortization.” However, people throw the acronym around as shorthand for a business’s core profit. In most cases, when someone uses the term Ebitda, they are saying, “I’m interested in the core value of the business and not as interested in the interest, taxes, depreciation, and amortization.”
So then, why does Ebitda matter? This one statistic gets at the core profitability of a business without all the extraneous financial factors that can skew balance sheets and profit/loss statements. In short, if one knows Ebitda for a company, many useful estimates are possible.
Furthermore, if, over time, one sees a growing Ebitda, one has a good idea that the business is growing–a handy thing to know.
How to grow Ebitda
There are several methods of growing Ebitda. And in truth, it is the combination of all these factors that result in a stronger Ebitda.
1. The organization must be built to grow
Organizations do not grow by chance. A business must be built to grow. That means lots of things. For instance, much of this website focuses on many critical issues needed for growth to occur in mental health practices. Here are the overview articles on many topics that will create growth:
- How to master the unrelenting business demands of practice
- The ultimate guide to building your staff and culture
- The ultimate guide to managing the demands of growth
- The ultimate guide to developing managers
When put together, all of these areas add to the growth of a business.
2. Must show growth over time
An equity fund VP I talked with summarized his view:
We buy a practice to grow it. And we look for a history of growth. It shows us that the practice knows how to do that. We want to see people who are hungry for growth.
Though he is not specifically talking about profit or Ebitda, he would be tracking Ebitda to see that trend of growth. Not all practices have taken steps to grow. Some owners intentionally constrain the growth potential of their practices. That tendency will show in the lack of growth over time, and the Ebitda trend will be flat. If that is the case, a purchaser may want to take what already exists and extend it. Of course, some employees who stay with the company will enjoy those changes and others will not.
3. Must have strong demand for your service (i.e., Good Service x Visibility)
For Ebidta to grow, the demand for the business’s services must be strong. Demand is a combination of providing good service plus letting people know about your business. Practices let people know about the company via marketing which, in turn, creates the visibility the business need. And exemplary service results from hiring, training, and managing the right people.
The pandemic has created a demand for mental health services as never before. And I do not see that demand tapering off any time soon.
4. Build strong hiring, retaining, & supporting systems
Perhaps more than any of the aspects of practice, hiring, retaining, and supporting clinicians is the name of the game right now. And with the pandemic, never have clinicians had more options. No one knows how insurance companies and the marketplace will shift in the next few years, but it is clear the stigma about seeking mental health help has diminished. Furthermore, teletherapy has changed the business model for clinicians, at least for the foreseeable future. I am guessing we will not go back to the old days.
Those practices that do a great job of hiring, retaining, and supporting clinicians will thrive in the next period. And likewise, those practices that get good at these tasks will flourish, and their Ebitda will show the results.
5. Processes for doing the daily things
Elsewhere I have written about the importance of focusing on the daily processes. While these things may seem unrelated to profit and Ebitda, they are not. The day-to-day stuff is perhaps the least sexy of all aspects of running a business, yet nothing is more important. The daily detail determines how much growth is possible.
There were times in my history of running a practice when our ability to grow was constrained by our capacity to do the daily stuff. We simply did not have the capacity to grow. Look at some of these posts on overcoming these challenges:
- The ultimate guide to developing managers
- Overcoming bottlenecks in mental health practice
- Grow hire, run out of space, repeat . . . forever
- Reducing in-the-trench psychotherapy to focus on practice management
6. Manage your money wisely
One of the simplest ways to improve Ebitda is to reduce expenses. Sounds easy. But that is not the case. So many expenses are fixed costs and not quickly reined in.
One particular type of expense was especially prone to get out of control–the monthly online fees. I preferred to spend more on a one-time service than to pay for monthly charges. Monthly payments are difficult to monitor and often stick around longer than needed.
I acknowledge that monthly fees may be the way to go in the early days when cash flow is difficult. But there are times when it would be better to finance a purchase and then be done with it when the charges are paid.
Put these together and see a growing Ebitda and profit
Now, of course, building Ebitda is a long-term effort. There is no quick fix that shows immediate results. Nevertheless, the business will grow when one does all of the above. And certainly, stringing together a series of ever-increasing Ebidta numbers will attract buyers when the time is right. In short, focusing on Ebitda over a long period will show the growth pattern that purchasers seek.