What do you do when investors and other industry stakeholders start raising concerns about “low EBITDA”? Raising your EBITDA is possible with these 6 tips.
Key Takeaways:
- Anybody hoping to improve their EBITDA should acquaint themselves with the concept of “basis points” in financial management
- Your EBITDA can be improved by adjusting your profit margins, choices of suppliers, and employee compensation
- Improving cash flow boosts earnings and by extension your EBITDA
EBITDA means earnings before interest, taxes, depreciation, and amortization, and it’s a key metric to gauge the health of your business. But it is one thing to know what EBITDA is and quite another to know how to improve it in order to support your long-term business goals.
Fortunately, in this post, we touch all that you need to know about improving your EBITDA so you can hit the ground running.
6 things that affect EBITDA basis points and which you can use to improve it
Before improving your EBITDA, or anything concerned with financial management for that matter, you must become acquainted with the concept of “basis points.” This will help you set credible goals and measure progress.
In financial management, basis points are the common unit of measure for percentages. One basis point is equal to 1/100th of 1% — or, more succinctly, 0.01% — and is used to represent percentage changes in financial metrics like return on assets and EBITDA.
So, a 1% change equals 100 basis points, and a 0.01% change equals 1 basis point. To illustrate, consider that you intend to improve your MSP’s EBITDA by 50 basis points: That would be a percentage increase of 50 x 0.01 = 0.50%.
That might seem small, but in reality, it isn’t. For example, if your MSP’s EBITDA is $50,000,000, then an increase by 50 basis points would be worth $250,000. That’s a lot of money you could invest back into the business in many forms that matter to the bottom line, like equipment, personnel, marketing, etc. You could also dole it out to shareholders, directly boosting your stock price.
Here are six things that you can do to improve your MSP’s EBITDA basis points:
- 1. Maintain prices and reduce costs
Discounting prices reduces your EBITDA. One of the most effective ways to improve EBITDA is to maintain your prices and sell your customers on the value of the service your MSP offers. Instead of changing prices, you can maintain them and look for areas where costs can be reduced to increase earnings.
- 2. Increase your working capital by managing inventory
Poor inventory management negatively impacts your working capital and EBITDA. To illustrate how, consider this: Every product you produce that is still collecting dust in inventory is something that has cost you money for which you are yet to collect revenue. The same thing can be said about services that depend on skills you spent money to teach your employees but which you are yet to sell.
In fact, poor inventory management like this affects your EBITDA twice because it costs you money and you have not collected any revenue for your trouble. To improve your EBITDA, you need to find the right balance between manufacturing and sales to keep things moving.
- 3. Optimize management of travel and entertainment expenses
You can improve EBITDA basis points by simply changing your attitude towards the travel and entertainment budget and how you handle it.
When you begin to look at your travel and expense budget as an investment rather than a pure cost, many things begin to change. For example, you can begin to ask yourself what the return is for taking a client out to dinner.
You can also start looking for ways to optimize the return on the T&E budget: Is it critical that everyone flies to a team meeting? Would a virtual meeting space work just as well and even be safer in this pandemic? Is visiting that customer in person really necessary? No? Make adjustments then and see your EBITDA basis points improve.
- 4. Change your sales commission plan
To ensure your MSP is not incurring the costs of sales only to be paid the following fiscal year —a situation that would do your EBITDA no favors, you can implement timing levers to reward sales that close earlier in the year. This motivates your sales team to close deals before the close of the fourth quarter because they would get more compensation quarter-on-quarter for closes.
This is just one example of how you can improve your cash flow and basis points by aligning your sales compensation plan with your MSP’s EBITDA goals.
- 5. Reduce the time to billing
There are few things more disheartening to the CEO of an MSP than when you spend valuable time (read: months) and resources (read: time and money) to acquire a client’s business, only to realize that the project can’t kick off immediately for some reason. This means yet more time before you can bill for all the effort you have sunk into the relationship. All these things negatively affect your EBITDA, as well.
The first step towards reducing billing time is to begin measuring it. Make “time to billing” one of your team’s core metrics. Define it as the time between when the customer signs a contract and when you can send the first invoice for monthly recurring service.
The reason a change like this is necessary is not hard to see: Longer time to billing makes for worse EBITDA. Once you start reducing time to billing, your EBITDA should rise accordingly with your cash flow.
Ways to reduce time to billing include:
- Refine communication between the project office, sales, and engineering
- Schedule engineering meetings for the day after contracts have been signed, no later
- Ensure sales accountability for reserving and planning implementation resources in advance of the sale
It should not take weeks or months after implementation before you can start billing a customer.
- 6. Buy from EBITDA-friendly vendors
There are many criteria you no doubt have to choose the vendors with whom you work. Make sure one of those criteria is being EBITDA friendly.
Your vendors and partners have a right to make money, but they don’t have to make it in a way that leaves you no wiggle room to improve your EBITDA. For example, as an MSP, your contracts are usually based on monthly recurring payments, so avoid vendors that try to make all their money upfront. Your MSP should not have to accommodate substantial risk and poor EBITDA simply because a vendor requires you to pay for a new system in one lump sum from the get-go.
To make your stance clear, when looking at major expenditures, craft your RFPs to clearly outline your need for EBITDA-friendly terms. Talk about how your MSP operates and request that they align their cash outflows as much as possible with your contracted cash inflows. This might require a bit of compromise, like a slightly higher per-unit cost in exchange for more favorable EBITDA terms.
Grow your EBITDA by boosting customer satisfaction
The more satisfied your customers are with the way you do business, the more likely they are to commit to longer contracts for longer periods. Crewhu is the first platform specifically designed to help MSPs boost customer satisfaction by gathering and leveraging data and feedback. Our solution makes it easy to collect customer, employee, and manager feedback and use this data to track company-wide progress. Book a demo with Crewhu today to learn more.
