Q

10 Proven Strategies to Upgrade Your Small Business’ Financial Position

EBITDA
Photo credit: Alexandr Bugaiov/adobestock.com

A specific passion likely led you to launch your small business. Be it a restaurant, a clothing boutique or a florist shop, many business owners seek to find an intersection between something they love and something they can do for a living.

Then, once operational, people often realize the cost of doing business: It’s not all about focusing on your passions. The behind-the-scenes tasks take more of your time than you had imagined. The marketing, the database management, the number crunching … it’s enough to drive you mad.

Sometimes you’re dealing with so many financial-related acronyms that your head spins. That’s why you hire an accountant and a bookkeeper — so you can focus on what you love about running your business, right?

While it’s natural to feel this way, the bottom line is that understanding your bottom line helps you run your business more efficiently and more profitably — and all small business owners want that!

Enter EBITDA. It’s an acronym you should get to know. It tells you so much about your business that ignoring it just isn’t wise.

What is EBITDA?

Let’s start with what EBITDA means. It stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In short, it’s a snapshot that portrays your company’s profitability and operating performance. By stripping away variables like taxes and debt, EBITDA shines a light on your core profitability. Hence, working towards improvements in this area can ultimately yield better cash flow and increase the valuation of your business.

Translation: strong EBITDA is a goal worthy of your attention.

Whether you’re looking to grow, hoping to attract investors or simply looking to improve your cash flow situation, working diligently to manage your EBITDA can optimize your small business’ financial position.

With that in mind, how can you improve your EBITDA? Let’s look at 10 proven strategies:

 

1. Review & Optimize Operating Costs

One of the most effective ways to improve profitability is by cutting unnecessary costs. Focus on streamlining your operations to eliminate inefficiencies without compromising quality. Some targeted steps include:

  • Begin with a comprehensive review of all operational expenses (from supplier contracts to utility bills and everything in between). What unnecessary expenses stand out? What costs could be improved by price shopping?
  • Negotiate better prices with vendors where possible, or explore alternative suppliers that offer the same quality at reduced costs.
  • Where can you use technology to automate repetitive tasks? Example: is there accounting software or a customer relationship management (CRM) system that will help you save time and labor costs?

 

2. Control Labor Costs

Speaking of labor — this is typically one of the largest expenses for many businesses. Therefore, improving labor management practices can significantly enhance EBITDA. Try these tips:

  • Implement workforce scheduling tools to align labor hours with peak operational needs. Depending on the type of business you own and operate, this could reduce overtime hours paid out without sacrificing productivity.
  • Regularly review roles and responsibilities to ensure your structure is as efficient as possible.
  • Cross-train employees to handle multiple tasks. This could potentially reduce the need for additional staff. Most importantly, it leads to better workflow when someone calls in sick and primes your team members for advancement opportunities as your business grows.

 

3. Increase Revenue

Ultimately, more revenue is always desirable for any business! By focusing on increasing revenue through your core products, you can improve EBITDA. Easier said than done as every small business is chasing revenue 24/7. Begin by evaluating your current offerings. Some strategies to consider:

  • Start with a profitability analysis of all products or services to identify higher-margin items. Shift efforts to aggressively promote and maximize sales of your highest-margin offerings.
  • Introduce upselling and cross-selling strategies. Are there complementary products or services you could add to your repertoire? Are there “premium” options that might appeal to your customer base?
  • Review pricing. While increasing prices must be done tactfully, even minor adjustments can yield significant EBITDA improvements.

 

4. Expand Revenue Streams

Diversifying revenue streams can provide an additional boost to your bottom line.

  • Explore new markets or customer segments that align with your long-term goals.
  • Develop additional services, such as consulting, training, or subscription models, that complement your current offerings.
  • Consider partnerships with other small businesses to co-create new opportunities that attract more customers.

 

5. Improve Inventory Management

For businesses that deal with products, inventory management directly impacts profitability. Excessive inventory ties up capital, while insufficient inventory can lead to missed sales opportunities.

  • Adopt inventory management software to accurately track stock levels and demand trends.
  • Free up capital by keeping inventory levels low. Receive supplies only when needed. This also reduces storage costs and waste.
  • Perform an inventory audit on a regular basis. Identify slow-moving items that may need to go.

 

6. Examine Fixed Costs

Significant improvements in EBITDA often come from decreasing fixed costs, which do not fluctuate based on your company’s sales.

  • Assess costs like rent, utilities, and insurance to comb for potential savings. Can you re-negotiate your lease? Can you shop insurance carriers for better pricing? Can you switch wireless carriers and achieve a better discount for the same service you already receive if you provide your crew members with cellular devices?
  • Could energy-efficient systems or sustainability practices reduce long-term expenses and waste within your business segment?

 

7. Leverage Tax Credits and Incentives

Making the most of tax credits and government incentives can provide a hidden boost to your EBITDA.

  • Work closely with your tax advisor to identify available credits for your business, such as research and development (R&D) tax credits or incentives for sustainable practices.
  • Ensure compliance with local tax laws to avoid penalties and unnecessary costs.

 

8. Outsource Non-core Activities

Outsourcing allows your team to focus on your core business activities while reducing the burden of administrative expenses.

  • Most small businesses should be outsourcing functions like payroll and IT support. Let the experts handle these tasks so you can focus on your core competencies.

 

9. Keep a Close Eye on Debt

Debt levels can significantly affect operating margins. Reducing debt or refinancing current loans can help free up cash and reduce interest-related expenses. To better manage your debt, consider the following:

  • Assess high-interest debts and explore refinancing options to secure lower rates.
  • Work to pay down principle quickly and reduce the number of outstanding loans.

 

10. Remember, the Process Never Stops

EBITDA improvement strategies should not be a one-time effort. Continuous evaluation and improvement are necessary to maintain growth. This is an ongoing exercise!

  • Adopt performance metrics to monitor EBITDA regularly. This allows you to identify trends and respond to them in a timely fashion.
  • Focus on efficiency in your company culture. Encourage employees to propose ideas to reduce costs or boost productivity. Reward them for their efforts.

EBITDA isn’t a four-letter word (OK, it’s not even a word!), so don’t treat it as such. Your accounting partner is a great resource, so at your next scheduled appointment with your CPA look further into where your EBITDA stands and how you can utilize some of these strategies to improve the profitability and performance of your small business.

10 Proven Strategies to Upgrade Your Small Business’ Financial Position

EBITDA

A specific passion likely led you to launch your small business. Be it a restaurant, a clothing boutique or a florist shop, many business owners seek to find an intersection between something they love and something they can do for a living.

Then, once operational, people often realize the cost of doing business: It’s not all about focusing on your passions. The behind-the-scenes tasks take more of your time than you had imagined. The marketing, the database management, the number crunching … it’s enough to drive you mad.

Sometimes you’re dealing with so many financial-related acronyms that your head spins. That’s why you hire an accountant and a bookkeeper — so you can focus on what you love about running your business, right?

While it’s natural to feel this way, the bottom line is that understanding your bottom line helps you run your business more efficiently and more profitably — and all small business owners want that!

Enter EBITDA. It’s an acronym you should get to know. It tells you so much about your business that ignoring it just isn’t wise.

What is EBITDA?

Let’s start with what EBITDA means. It stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In short, it’s a snapshot that portrays your company’s profitability and operating performance. By stripping away variables like taxes and debt, EBITDA shines a light on your core profitability. Hence, working towards improvements in this area can ultimately yield better cash flow and increase the valuation of your business.

Translation: strong EBITDA is a goal worthy of your attention.

Whether you’re looking to grow, hoping to attract investors or simply looking to improve your cash flow situation, working diligently to manage your EBITDA can optimize your small business’ financial position.

With that in mind, how can you improve your EBITDA? Let’s look at 10 proven strategies:

 

1. Review & Optimize Operating Costs

One of the most effective ways to improve profitability is by cutting unnecessary costs. Focus on streamlining your operations to eliminate inefficiencies without compromising quality. Some targeted steps include:

  • Begin with a comprehensive review of all operational expenses (from supplier contracts to utility bills and everything in between). What unnecessary expenses stand out? What costs could be improved by price shopping?
  • Negotiate better prices with vendors where possible, or explore alternative suppliers that offer the same quality at reduced costs.
  • Where can you use technology to automate repetitive tasks? Example: is there accounting software or a customer relationship management (CRM) system that will help you save time and labor costs?

 

2. Control Labor Costs

Speaking of labor — this is typically one of the largest expenses for many businesses. Therefore, improving labor management practices can significantly enhance EBITDA. Try these tips:

  • Implement workforce scheduling tools to align labor hours with peak operational needs. Depending on the type of business you own and operate, this could reduce overtime hours paid out without sacrificing productivity.
  • Regularly review roles and responsibilities to ensure your structure is as efficient as possible.
  • Cross-train employees to handle multiple tasks. This could potentially reduce the need for additional staff. Most importantly, it leads to better workflow when someone calls in sick and primes your team members for advancement opportunities as your business grows.

 

3. Increase Revenue

Ultimately, more revenue is always desirable for any business! By focusing on increasing revenue through your core products, you can improve EBITDA. Easier said than done as every small business is chasing revenue 24/7. Begin by evaluating your current offerings. Some strategies to consider:

  • Start with a profitability analysis of all products or services to identify higher-margin items. Shift efforts to aggressively promote and maximize sales of your highest-margin offerings.
  • Introduce upselling and cross-selling strategies. Are there complementary products or services you could add to your repertoire? Are there “premium” options that might appeal to your customer base?
  • Review pricing. While increasing prices must be done tactfully, even minor adjustments can yield significant EBITDA improvements.

 

4. Expand Revenue Streams

Diversifying revenue streams can provide an additional boost to your bottom line.

  • Explore new markets or customer segments that align with your long-term goals.
  • Develop additional services, such as consulting, training, or subscription models, that complement your current offerings.
  • Consider partnerships with other small businesses to co-create new opportunities that attract more customers.

 

5. Improve Inventory Management

For businesses that deal with products, inventory management directly impacts profitability. Excessive inventory ties up capital, while insufficient inventory can lead to missed sales opportunities.

  • Adopt inventory management software to accurately track stock levels and demand trends.
  • Free up capital by keeping inventory levels low. Receive supplies only when needed. This also reduces storage costs and waste.
  • Perform an inventory audit on a regular basis. Identify slow-moving items that may need to go.

 

6. Examine Fixed Costs

Significant improvements in EBITDA often come from decreasing fixed costs, which do not fluctuate based on your company’s sales.

  • Assess costs like rent, utilities, and insurance to comb for potential savings. Can you re-negotiate your lease? Can you shop insurance carriers for better pricing? Can you switch wireless carriers and achieve a better discount for the same service you already receive if you provide your crew members with cellular devices?
  • Could energy-efficient systems or sustainability practices reduce long-term expenses and waste within your business segment?

 

7. Leverage Tax Credits and Incentives

Making the most of tax credits and government incentives can provide a hidden boost to your EBITDA.

  • Work closely with your tax advisor to identify available credits for your business, such as research and development (R&D) tax credits or incentives for sustainable practices.
  • Ensure compliance with local tax laws to avoid penalties and unnecessary costs.

 

8. Outsource Non-core Activities

Outsourcing allows your team to focus on your core business activities while reducing the burden of administrative expenses.

  • Most small businesses should be outsourcing functions like payroll and IT support. Let the experts handle these tasks so you can focus on your core competencies.

 

9. Keep a Close Eye on Debt

Debt levels can significantly affect operating margins. Reducing debt or refinancing current loans can help free up cash and reduce interest-related expenses. To better manage your debt, consider the following:

  • Assess high-interest debts and explore refinancing options to secure lower rates.
  • Work to pay down principle quickly and reduce the number of outstanding loans.

 

10. Remember, the Process Never Stops

EBITDA improvement strategies should not be a one-time effort. Continuous evaluation and improvement are necessary to maintain growth. This is an ongoing exercise!

  • Adopt performance metrics to monitor EBITDA regularly. This allows you to identify trends and respond to them in a timely fashion.
  • Focus on efficiency in your company culture. Encourage employees to propose ideas to reduce costs or boost productivity. Reward them for their efforts.

EBITDA isn’t a four-letter word (OK, it’s not even a word!), so don’t treat it as such. Your accounting partner is a great resource, so at your next scheduled appointment with your CPA look further into where your EBITDA stands and how you can utilize some of these strategies to improve the profitability and performance of your small business.