Hey, Reader,

This is Part 2 on yesterday's email. Let’s calculate EBITDA.

EBITDA stands for earnings before interest, taxes, depreciation and amortization.

For a small consulting practice, think of it as an operating health check:

How much did the business produce after covering the normal costs of delivering the work and running the business?

The calculation changes slightly depending on how you pay yourself.

Let’s use a $150,000 consulting practice.

If you pay yourself through payroll:

$150,000 in revenue
– $25,000 for contractors and project support
– $20,000 for operating expenses
– $75,000 for your salary and payroll costs
= $30,000 in EBITDA

Your compensation is already included as a business expense. You do not subtract it again.

If you pay yourself through owner draws or distributions:

$150,000 in revenue
– $25,000 for contractors and project support
– $20,000 for operating expenses
= $105,000 in EBITDA on your books

Because owner draws do not appear as an expense, we still need to account for the value of your work:

$105,000 in EBITDA
– $75,000 in fair owner compensation
= $30,000 in adjusted EBITDA

The financial picture is the same. The difference is where your compensation appears in the accounting.

That $75,000 paid you for your work.

The remaining $30,000 gave the business room to build reserves, invest, hire or grow.

That is a 20% EBITDA margin:

$30,000 ÷ $150,000 = 20%

Now you can see how much of the revenue compensated you and how much created additional capacity for the business.

Do you currently separate your pay from your business profit?

Note: I'm not a financial or accounting professional. Your tax structure determines which method applies and helps you know what expenses you need to include, so confirm that piece and any money things you do with your accountant.

It took me five years into my business to understand this. Passing along to you now to maybe (hopefully) save you some time.

Do you currently separate your pay from your business profit?

Next newsletter next Monday...

In solidarity,

Kamilah