EBITDA is only meaningful if you pay yourself properly By Ross Martin. August 9, 2017.
If you run a dental practice, or any other business, you will have heard of EBITDA: earnings before interest, taxes, depreciation and amortisation. It’s got resonance among practice owners at the moment as a useful metric to see how your business is doing. So how important is it? We asked Ross Martin, accountancy director at Hive Business. Thanks Ross.
If you get drawn into the accountancy definition of EBITDA you’ll disappear down an Alice In Wonderland hole, but that’s not the point, and I don’t want to get technical here. Let’s just say there are a few reasons why dentists should assimilate EBITDA into their business reporting.
More and more practices are being valued based on profit rather than turnover. EBITDA is just a consistent way of measuring profit. However, it’s only meaningful if the principal pays himself properly, just like any other person in the practice. Not too much, not too little. If you do that it’s a good way of avoiding the delusions that many practice owners fall prey to about how well they’re doing.
Far too many practice owners operate hand to mouth. Money comes in, there’s some left at end of month, and they say to themselves, “I’ll take £12k.” Next month, there’s more, so they take £15k. That’s not common sense. When corporates and the rest of the industry are recognising value based on profit, principals should pay themselves in a proper fashion. You can’t say what the profitability of a company is when the owner pays themselves whatever they feel like.
EBITDA may be a useful benchmark, but it is only one element of the story. It ignores cash. That’s not quite so relevant in dentistry because there’s a minimal stock element, but when a business fails, it’s usually because of cash flow problem.
EBITDA is a benchmark that accountants agree on. It’s part of the process of understanding your business and making it better. But it’s not the only thing to look at. You wouldn’t buy a car and worry about the 0 to 60 but forget how it sounds, feels and handles. Metrics can distract us, even though they are useful.
So while I look at it, I rarely talk to practice owners specifically about EBITDA. I am strong on the principal paying themselves, then we can look at what segment of profit is left over. Then we can get to the question of how much your business is worth.
I wrote an article about how pubs used to be valued based on turnover, and how that ended up with 27 closures a week. The pub industry matured, just like dentistry is maturing. So stop subsidising your business. Stop not paying yourself a market rate. Pay yourself normally and see how profitable you really are.
If they did this many practices would go from 25-35% (assumed) profitability to 3-5% (actual) profitability. That’s how badly many of them are run, without realising it. Some practice owners aren’t even charging the business rent. So EBITDA is everything and nothing. It is really important, but it is only a metric, and one of many.
When you start looking at things together, that’s when it gets exciting. Some of my clients say to me: “I take £10k a month, but in my informal reporting I want you to put in what my normal associate pay would be. That’s when the magic comes in, when they start eeking out an extra percentage of profitability here and there. Rent and rates might be 6% of turnover but if your capacity in surgery is hovering around 60%, improve that and premises costs drop from 6 to 4.5% — this is when you lift the profitability of a business.
It’s amazing how many businesses plateau along at mediocrity. If they knew they were only making 3 or 5% profit they would be shocked. But they can get to 15%. EBITDA, taken with a frank appraisal of whether the practice owner is subsidising the business in any area, is a great start.
Ross Martin | firstname.lastname@example.org
Accountancy Director | Hive Business
“Some practice owners aren’t even charging the business rent”
Ross Martin, accountancy director, Hive Business