Although it might sound like just another business-related acronym, EBITDA is actually a valuable and quite accurate measure of a business’s key profits and profit trends over time. It strips away all external factors and offers a simple, straightforward version of your business’s financial information to give you a clear picture of its growth.
Naturally, if the EBITDA formula indicates positive profitability in a business, then you’d want to take any steps you can to improve your digital agency’s EBIDTA and promote strong future growth.
But what exactly is this metric, how does affect your business’s bottom line, and how do you go about improving it?
We have the answers.
What is EBITDA?
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It’s a non-GAAP metric that can measure your agency’s financial performance and revenue streams and excludes debt-related expenses to clarify the data.
Simply put, it’s a more accurate measure of performance. It shows your earnings before they’re influenced by accounting and financial decisions.
How EBITDA Affects Agencies
EBITDA is more than a financial metric. It can also affect your agency in several important ways – primarily because it has a few lesser-known roles to play in the greater business sector. This metric provides a method through which to compare agencies to one another and against essential industry statistics and averages.
It’s often used to estimate the cash flow an agency has available to pay off debt from the investment of long term assets. It can measure your core profit trends and be used to value your business for investors and banks. It may even determine the debt service coverage ratio for future business loans.
TL; DR: The higher your EBITDA is, the more positively lenders, investors, and customers will view your agency.
How to Improve Your EBITDA
Enhancing your EBITDA is easy when you’ve got the right information. Here’s what you need to know.
#1: Find Alternative Suppliers
Your suppliers could be making or breaking the profitability of your agency, depending on how much – and how fairly – they’re charging you. Do some research into average pricing for each supplier’s industry and make a note of whether your supplier makes the grade.
If they’re overcharging, it may be time to negotiate, or find a new supplier that provides the same quality at more competitive prices.
#2: Discover Ways to Reduce Costs
In many cases, it’s easier to save the money you have than to continuously make more. If you’re aiming to improve your agency’s EBITDA, cost reduction is an excellent starting point with rapid results. Start with an audit of your expenses and utility bills to identify any areas you’re overpaying, then correct them to give your profitability a boost.
Additionally, consider restructuring your management team and scaling down other teams if feasible. While you’re at it, eliminate all unnecessary or non-essential expenses to keep your costs low.
#3: Lower Your Cost Per Acquisition
Cost per acquisition is the total expense your agency faces after signing a new client. Reducing this metric is one of the best things you can do for your EBITDA.
Start by assessing your online store or website and fixing any technical issues like broken links or forms. This will make it much easier for clients to contact you, decrease your bounce rates, and see your CPA rate plummet!
Next, it’s time to optimise your landing page for conversions. Your landing pages should include just the right amount of SEO-friendly content, CTA buttons, and form fields to convert as many visitors as possible.
Finally, you need to perfect your ad campaigns to maximise their efficacy without tearing through your marketing budget. Using automation tools is a great way to optimise ads and campaigns for the best possible ROI.
#4: Use Time More Efficiently
Time is money. So, wasting time is equivalent to wasting profits.
Kick the habit by using AI software to automate tedious, time-consuming tasks, leaving you free to work on tasks that generate better profits.
If you use AI effectively, you may reduce your office days or work from home. This can reduce your office overhead costs and fuel your EBITDA even further.
Increasing EBITDA During a Recession
We’re rapidly approaching another recession. Unfortunately, there’s no doubt your agency will be affected at one point or another. However, there’s a silver lining.
If you can improve your agency’s EBITDA, you’ll be given a strong agency valuation that ensures banks, lenders, and investors will still be interested in assisting you, even though times are tough.
Your EBITDA margin could also mean the difference between racking up debt during the recession (if it’s low) and bringing in record profits (if it’s high). Our guide on building a recession-proof digital agency has everything you need for when the going gets rough.
In Summary…
A simple EBITDA calculation can tell you exactly how profitable your digital agency is, what its core growth rate is, and how you can maximise your ROI and keep your cash flow strong.
Improving your EBITDA could be the key to recession-proofing your business and achieving the growth you’ve been waiting for.