How do You Calculate Restaurant EBITDA?
Operating a restaurant is a challenging experience for investors and restaurateurs. Restaurants are subject to high operating expenses and a thin profit margin, making it difficult to determine the real value of a restaurant. EBITDA shows the earning power of the business based on its cash flow. This article covers the following important points:
- What is Restaurant EBITDA?
- What is adjusted EBITDA?
- Why Use Restaurant EBITDA?
- How to Calculate Restaurant EBITDA?
- Ways of Improving Restaurant EBITDA
What is Restaurant EBITDA?
EBITDA is an accounting acronym that stands for Earnings Before Interest, Taxes, Depression, and Amortization. It is a metric used to determine a restaurant’s worth before adding factors like depression, taxes, and interest. This metric represents restaurant earnings from operations excluding the effects of accounting, financing, and capital spending. The ideal EBITDA for businesses in the restaurant industry is between 13 and 30% of the sales.
EBITDA is different from the restaurant operating profit. Operating profit is calculated directly by subtracting costs of goods sold (COGS) and expenses from the total restaurant sales. EBITDA subtracts all non-cash items. It focuses on operating expenses while excluding general and administrative costs. This makes it more effective in comparing a business against another since they carry different depreciation and debt levels.
What is adjusted EBITDA?
Adjusted EBITDA includes the removal of one-time and irregular items from EBITDA. Adjusting restaurant EBITDA provides a normalized number of regular gains and losses. This metric is useful to investment bankers, financial analysts, and other financial professionals in making key decisions. Some of the items excluded in Adjusted EBITDA include non-cash items, unrealized gains and losses, one-time gains and losses, non-operating income, and litigation expenses.
Why Use Restaurant EBITDA?
EBITDA considers earnings from restaurant operations only. It excludes earnings related to accounting, financing, and capital expenses because they are not directly related to business operations. This allows restaurant management to get an accurate value of the business before the impact of tax jurisdiction, capital structure, and interest payments.
EBITDA is an important metric when buying, selling, or investing in a restaurant. It helps value the restaurant, allowing investors and restaurateurs to make informed decisions. While two restaurants may report the same operating profits, they may have different EBITDAs. This means a restaurant with more EBITDA is more attractive.
How to Calculate Restaurant EBITDA?
Every restaurant owner or manager needs to understand how to calculate EBITDA. The process involves subtracting fixed costs from restaurant gross profit. Based on your available data, EBITDA can be calculated based on net income, or operating profit. You can also calculate EBITDA margin based on restaurant revenue.
- Net Income
This formula involves adding interest, depreciation, taxes, and amortization back to your net income. Any additional operating income from secondary operations, investments, and on-term payment of asset sales should also be added back. The formula is as follows:
EBITDA = Net Income + Taxes + Interest + Amortization + Depreciation
- Operating Profit
The formula for calculating EBITDA based on operating profits is quite simple. You add depreciation and amortization back to the operating profit reported on the income statements. You may also add interest if it is part of your operating profit. The formula is as follows:
EBITDA = Operating Profit + Depreciation Expense + Amortization Expense
- Margin Formula
When you express EBITDA against the revenue, you get its margin. The formula is as follows:
EBITDA margin= EBITDA/Total Revenue
Ways of Improving Restaurant EBITDA
Improving restaurant EBITDA requires you to focus on cash items of your revenue. This means increasing your earnings and reducing your cost. Some of the ways you might find effective include:
- Upselling: Train your staff to upsell your menu items. The more you upsell, the more sales you make. This means an increase in your earnings.
- Managing Labor Costs: Effective labor cost management practices will help you reduce your operating costs. Ensure you make smart labor scheduling decisions to avoid spending unnecessary costs on your staff. You can adjust the shifts based on factors like time of day, holidays, and seasons.
- Menu Engineering: The way you design your menu has a direct impact on your restaurant’s profit. Use menu engineering tactics like strategic placements, visual designs, and item listing to encourage the sale of products with higher profits.
- Improved Inventory Management: Proper inventory management will reduce costs related to waste while increasing the profits. Reduce instances of over or under purchasing, improper portioning, spoiled ingredients, and other avoidable inventory-related costs.
EBITDA is one of the metrics used to show the financial performance of a business. It is used to determine the earning potential of a restaurant. This is achieved by including some of the factors stripped out when calculating your business’s profitability.