As a business owner, you're an expert in your craft. You know your customers, your products, and your industry inside and out. You're a master of operations, marketing, and sales. But when it comes to the language of finance-EBITDA, debt-to-equity, working capital-it can feel like a world away from your day-to-day priorities.
Many owners rely on the "bank balance method": as long as there's money in the account, things are going well. While cash flow is king, understanding a few key financial metrics tells a much deeper story about your business's health. More importantly, it’s the language lenders speak.
Knowing these numbers not only empowers you to make smarter strategic decisions but also positions your business for success when it’s time to seek finance for growth. Let's break down three of the most important ones.
1. EBITDA: Your Business's Core Profit Engine
EBITDA stands for Earnings Before Interest, Tax, Depreciation, and Amortisation. It sounds complicated, but the concept is simple: it’s a measure of your business’s raw operational profitability.
Think of it as a health check-up that ignores factors like your existing loan payments (interest), government obligations (tax), and non-cash expenses (depreciation and amortisation). It answers one fundamental question: at its core, is your business a money-making machine?
- Why it Matters: Lenders love EBITDA because it gives them a clear, clean view of your ability to generate cash to service new debt. A strong, consistent EBITDA shows that the fundamentals of your business are solid, making you a much more attractive borrower.
- Simple Example: Imagine a landscaping business. Its EBITDA would be its total revenue from jobs, minus the direct costs of running the business-things like wages for the team, fuel for the mowers, plants, and insurance. It's the profit before the owner pays tax or makes repayments on the ute loan.
2. Debt-to-Equity Ratio: The Balancing Act
This ratio measures how much of your business is funded by debt versus how much is funded by your own investment (equity). It's a snapshot of your company's financial leverage and risk.
- Why it Matters: A high debt-to-equity ratio can be a red flag for lenders. It suggests that the business is heavily reliant on borrowing and might struggle to take on more debt. It’s like a see-saw; too much weight on the debt side can make things unstable. Conversely, a very low ratio might indicate that you have an opportunity to strategically use debt (leverage) to grow faster than you could by only reinvesting your own profits.
- The Goal: There's no single "perfect" ratio, as it varies by industry. However, demonstrating that you have a healthy balance and a good amount of "skin in the game" builds a lender's confidence.
3. Working Capital: The Fuel in Your Tank
Working Capital is the difference between your current assets (cash, accounts receivable) and your current liabilities (accounts payable, short-term debts). It is the lifeblood of your business, enabling you to manage day-to-day operations smoothly.
You can have a profitable business on paper, but if you don't have enough cash on hand to pay your suppliers, staff, and rent, you have a working capital problem.
- Why it Matters: Positive working capital shows a lender that you can cover your short-term obligations without stress. It demonstrates good financial management and stability. It proves you have the fuel in the tank to handle unexpected expenses or seize sudden opportunities, ensuring the business remains resilient.
These numbers aren't just for your accountant to worry about once a year. They are vital tools that provide a clear, honest picture of your business. Understanding them helps you plan for the future, identify areas for improvement, and speak the same language as financial partners.
At Geared Finance, we do more than just process applications. We help you understand the story your numbers tell. Ready to prepare your business for its next stage of growth? Contact Us
