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Executive Secrets to Leveraging I.T. to Improve EBITDA

Executive Secrets to Leveraging I.T. to Improve EBITDAEBITDA plays a critical role in determining the value of your business. It not only portrays your operating profits but is also used as a yardstick in setting the price an investor is willing to pay for your business.

This ebook provides a detailed guide on the meaning of EBITDA, what it means for your business, and how to improve it to get a better valuation of your business.

EBITDA reflects the performance of your company.

The higher the EBITDA, the greater the value of your

business. Knowing how to present a good EBITDA is a

valuable skill that every business leader needs to have.

Executive Secrets to Leveraging I.T. to Improve EBITDA 2 JMARK.COM | 844-44-JMARK

Executive Secrets to Leveraging I.T. to Improve EBITDA 3

Measuring the performance of your business is important. A financially healthy company demonstrates to your stakeholders that your business is profitable and growing.

Many different measures can be employed to measure performance; one of the most common and widely preferred metrics is

It is used in the financial markets as a measurement for credit analysis, financial statements review, and company valuation.

By eliminating non-operating factors, EBITDA allows comparison between similar financial metrics, making it a preferred approach for financial analysts and investors when comparing performance between two companies.

Chapter 1Introducing EBITDA

EBITDA: earnings before interest, taxes, depreciation, and amortization.

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EBITDA is an alternative to other performance metrics such as revenue, earnings, and net income. It excludes non-operating factors in its calculations and focuses on the financial impact of operating activities. Therefore, it is a good reflection of operating profit, operating performance, and business efficiency.


The Valuation Metric

As a valuation metric, EBITDA is used to present a fair reflection of the value of a company. It is a widely accepted metric mainly due to the following advantages:


2. It is reliant on income statement variables which can be manipulated to portray a positive EBITDA.

3. It does not take into account changes in working capital. As a result, it does not reflect the cash needs of a company in the short-, medium-, and long-term.

4. By ignoring depreciation, it allows companies with a large number of assets to appear financially stronger than they actually are. Therefore, one is not able to judge the short- and long-term effects of asset requirements for a business.

Critics, therefore, warn that

Nonetheless, despite the criticism,

• It’s straightforward and simple to calculate—all the variables associated with EBITDA are easy to understand. One can work from income statements without the need for external input.

• It enables standardization and easy comparison—by eliminating variables such as interest, depreciation, amortization, and tax, it becomes easy to compare two companies without biased influences.

Shortfalls

Every performance metric has its shortfalls.

Despite it being a widely used performance metric, there have been strong critics of the use of EBITDA as a sole measure of a company’s performance. For example, Moody’s investor’s services listed ten shortfalls associated with EBITDA. Some of these shortfalls include:

1. It is not recognized by IFRS as a performance measure and can have different interpretations under various countries’ GAAP rules; hence, the formula and its variables can be interpreted differently. This also means that the formula does not provide a consistency check for accounting practices.

EBITDA should not be used in isolation, but needs to be viewed in the light of other metrics. It is important also to consider other performance measurements so as to get a holistic picture of a company’s fundamentals.

EBITDA remains one of the most relied upon

valuation and performance metrics.


EBITDA FormulaThe formula for calculating EBITDA is:

EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationOREBITDA = Operating Profit + Depreciation + Amortization

Source: Corporate Finance Institute

Measure of Profitability

An analysis of the EBITDA formula will reveal that it is essentially a measure of a company’s profitability.

In this ebook, we will look at two areas of technology which an executive can address to improve EBITDA. It will start by delving into the impact of effective use of data analysis and also examine various factors that influence gross profit and, ultimately, EBITDA.

The two main components of profits are revenue and costs. Therefore, any activity

that increases revenue or reduces costs will have a direct impact on EBITDA.



Research has shown that leading companies utilize and interpret data to give them a competitive edge.

A study done by Harvard Business Review and Oracle found that “sophisticated data intelligence and sales technology capabilities are the hallmark of sales organizations that outperform their competitors.”

Effective data analysis is at the core of successful business leadership. A survey done by Mckinsey revealed that 53% of companies that were rated as “high performers” were effective in the use of analytics in their decision-making process.

An analysis of performance across different dimensions provides insights into the profit drivers of your business. It helps decisions and strategies to be developed based on facts and not opinions.

In their article, “The Value of Big Data,” Bain & Company found that companies that use data analytics outperform their competition by a wide margin. Their research showed that “these companies are:

A savvy CEO who is keen to improve EBITDA and profitability needs to learn how to integrate data insights into important decision-making processes.

Chapter 2Growing EBITDA Using Data Analytics


Data analytics have become a key contributor to business success. If used properly, it is one of the best avenues for improving your company’s EBITDA.

• Twice as likely to be in the top quartile of financial performance within their industries.

• Three times more likely to execute decisions as intended.• Five times more likely to make decisions faster.”


How Data Shapes Business Performance

Data analytics seeks to identify business variables, correlations, and patterns so as to improve decision making and better manage important business functions. It involves the use of data to gain business insights to drive strategy, change processes, improve performance, and gain competitive advantage.

Key business decisions are based on analyzing “who, what, how, and where” in relation to a company’s products, services, customers, and channels.

Identifying Profit Drivers

Data helps you gain a better understanding of the factors that influence your profit figures.

Proper use of data analysis can give key insights into these areas to support business decisions and performance.

Analyzing data will help you understand your markets, customers, and the value behind your products and services.

As an executive, data analysis will help you to know what your customers are buying and their frequency of buying, buying habits, and preferred channels of distribution. It will help you narrow down to your best-selling products and services and the most profitable channels. You will also be able to measure market reactions to your products and services, identify your best markets, and leverage market trends.

Understanding and making the right decisions in these areas helps to prioritize and focus on the key components that drive a company’s EBITDA.

EBITDA is a reflection of your company’s operating

profits. Therefore, to improve your EBITDA, you must

understand what drives your profits.


8

Ultimately the goal of effective data analysis is to assist

in the identification of key opportunities, challenges,

and revenue drivers.

Once these are properly understood, the business can tailor its products and services to drive better sales, build a stronger profit strategy, make more accurate forecasts, identify the best channel distribution mix, and, in the long run, improve your EBITDA.

The impact on the bottom line

According to a study of 150 Fortune 1000 companies carried out by the University of Texas, effective data analysis has the following impact on business:

1. It boosts employee productivity: An increased use of data by 10% translated in an increase in $2.01 billion annual total revenue, or $55,900 in increased annual sales per employee.

2. Increased quality of data and accessibility of it for salespeople resulted in an increase of return on equity by 16%.

3. Increase in the mobility of sales data by 10% resulted in net income increasing by an average of $5.4 million and an increase of return on invested capital by 1.4%.

4. A 10% increase in intelligence and access to data resulted in an increase in return on assets by 0.7%, or an extra $2.87 million of income on average.

Source: Measuring the Business Impacts of Effective Data

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Data Analytics Critical Success Factors

Despite the overwhelming evidence of the role that data analytics plays in improving profitability, many companies are not adequately utilizing their data. As a result, they are missing great opportunities to gain valuable insights.

Effective data analysis requires a structured approach. You need to bring your team together to develop a data analytics strategic plan. This plan will enable you to link your data analysis to the overall business strategy. It is important to get this right from the onset.

Please note that not all data is equal. According to the article “How Data and Analysis Can Give Your Company an Edge,” “It’s not just about gathering data because you can, but about gathering the right data and gaining a clearer picture of client behavior, markets, and where your industry might be headed.”

Your data strategy should identify the sources of data. You can use internal data gathered from your website, mobile devices, financial management systems, sales distribution channels, social media, customer feedback, etc. You can also leverage external sources of data, including open data sources, competitors’ data, industry newsletters, and the media.

After determining your sources of data, the next step involves identifying which data analytics tools will be used, how the data will be structured, the best data models that suit your company, the infrastructure needed, and the internal capabilities of conducting the analysis.

First, as a business, you must understand that data is an

enabler of success, not an end to itself. It is important to

determine what you want to achieve. You need to identify

the questions that the business is seeking answers to.

In determining the best approach, remember that data analytics reports should not be so complex that they cannot be used. The data must be translated into language that can be easily transformed into tangible action.

When considering data analytics, a business can decide to employ internal resources or seek the help of an external data analytics expert. Partnering with a data analytics expert helps you to leverage years of experience in analytics combined with specialized industry expertise.

Improving EBITDA with Data

Research has shown that leading companies are data-driven. They leverage data to make decisions, improve profitability, and ultimately grow their EBITDA. Such companies have understood the power behind effective data analysis.

A business leader keen on improving EBITDA should look into data analysis as a strategic performance driver. A good data analysis strategy will assist in ensuring value is not left on the table by providing business insights which would otherwise have been missed.

Executive Secrets to Leveraging I.T. to Improve EBITDA


Many companies view I.T. as an unfortunate but necessary cost which should be kept as low as possible. However, with the right technology and the correct approach, I.T. can be a powerful tool to drive your company’s EBITDA.

For many businesses, I.T. investments can be a daunting proposition, especially where the costs seem high and the benefits are not very clear. With emerging I.T. innovations, any executive looking to increase EBITDA must understand how I.T. adds value to the bottom line.

Chapter 3Leveraging I.T. to Improve EBITDA

Embracing I.T. as a key component of strategy can help cut costs, improve efficiency, increase productivity, and ultimately grow profits. When used this way, I.T. becomes a driving force behind business expansion and growth.

A Means to Increase Efficiency and Productivity

Manual business processes can be tedious and time-consuming.

Unfortunately, in many businesses, a high

proportion of staff spend valuable time

performing repetitive and routine tasks.


Technological advancements have created many opportunities for automating manual processes. Business process automation can range from simple automation of financial processes to more complex automation of the procurement-to-pay process. Regardless of whether it’s simple or complex automation, the aim is to improve efficiency and productivity.

Let us examine some common business automation strategies.

Accounting Processes

The automation of accounting processes has changed the face of accounting. According to the article “Accounting at the Speed of Change,” “Technology trends in big data, cloud, mobile applications, robotics, virtual reality, and artificial intelligence are having a massive impact on the way accountants do their work, share information, and provide services.”

Automation of accounting processes will enable your business to manage the accounting cycle better. It makes it easier to perform monthly financial close, apply financial controls in every step of the accounting process, and provide

Supply Chain Processes

A technology-driven supply chain enables your business to tie together the end-to-end supply chain process, creating seamless workflows that ultimately result in increased efficiency, enhanced productivity, and cost reduction.

Supply chain automation enables your business to eliminate manual order-to-cash processes by supporting automatic

Eliminating routine and repetitive manual business processes not only reduces costs, it also frees up staff to concentrate on more income-generating activities which will grow the company’s top line.

accurate, real-time financial information to assist in management decisions.

In a 2018 survey done by ACCA, CANZA in collaboration with KPMG, it was reported that, “The current evolution of automation technology is transforming the face of finance for the better, presenting today’s business leaders with a unique opportunity.”

“Leaders that choose to embrace

the change will thrive. Those that

don’t, risk irrelevance. It’s stark

and very simple.”


generation of sales orders, tracking of order fulfillment, acceleration of billing, and speeding up deliveries. All these reduce the time it would take to manually process an order, resulting in efficiency and improved customer experience.

Supply chain automation also has a direct impact on reducing inventory storage costs. Through automation, a business is able to conduct demand forecasts and supply chain analysis. This allows it to maintain optimum stock levels, leading to lean inventory management and reduction of huge stock storage costs.

One key I.T. tool that can assist your firm in doing all these is a CRM system.

Automating your customer relationship management and combining it with A.I., predictive analytics, and data analytics, allows your business to get an in-depth knowledge of your customer, which can inform sales and business expansion strategy.

Customer Relationship Management (CRM)

Forging a deep relationship with your customers is a key driver to growing your sales and market share.


A word of caution:

While automation and increased adoption of I.T. is the way to go for a business keen to improve EBITDA, it is important to adopt a structured and well-thought-out approach.

As a growing business, it would be counterproductive to attempt to have 100% of all your systems automated in one go. There is a need to map out existing processes first, identifying which areas would benefit the most with automation, and determine where the business would garner the most value.

Getting it right from the word go is critical to ensuring that your business is able to take advantage of the opportunities while eliminating the huge costs that would result in wrong investments. In deciding the best I.T. approach to adopt, it is important to call in the experts.

The right MSP will partner with you to help you:

Adopt the best I.T. strategy that supports your business objectives and enables cost optimization.

Develop the best I.T. policy, in line with regulation and compliance requirements.

Implement the best I.T. security and controls management architecture.

Provide guidance on the most appropriate I.T. outsourcing services.

Take the time to find an I.T. solutions provider that has the expertise to help you analyze the current state of your I.T. and advise on the best approach to adopt in order to get the most significant gains from your I.T. investment.


Adopting Cloud Computing

This ebook would not be complete without delving into the revolutionary manner in which cloud computing is changing the face of business and can be a great driver of EBITDA. Cloud computing is the delivery of I.T. services through the internet. IBM defines it as “the delivery of on-demand computing resources over the internet on a pay-for-use basis.”

Cloud computing can increase your profitability by significantly reducing your I.T. costs and increasing the productivity of your team. According to an article by CIO, “Cloud computing can create a significant return on investment, affording energy, licensing and administrative costs, and it frees up capital and personnel to innovate on new ideas quickly.”

Moving to the cloud enables a business to have access to world-class I.T. at an affordable price. It saves on the costs of buying and maintaining in-house I.T. infrastructure. Instead of buying a server and hiring I.T. professionals, a business can opt to go the cloud computing route via a flat monthly rate.

Apart from providing a platform, cloud computing providers usually offer a vast array of services, including I.T. security management, ensuring real-time backup of data, routine maintenance, and disaster recovery.

This saves the business time and the cost of maintaining servers, storage disks, and other hardware and software associated with I.T. systems.

Another key benefit of cloud computing is the fact that it eliminates the barriers associated with physical office space. It allows remote access to the I.T. network, therefore enabling staff to collaborate on projects from any location and at any time.

The impact of cloud computing on efficiency and productivity is phenomenal. This is captured well by Oracle’s “Top 10 Cloud Predictions 2019,” which indicate that

Any leader who is keen on growing EBITDA should review the need to adopt cloud computing as a strategic driver of business growth.

80% of all critical workloads will move to the cloud due to the fact that this creates flexibility, reliability, and improved performance capabilities.

Such cost savings not only impact the bottom line, but it also frees up resources which can be directed to more revenue-generating activities.


Common I.T. pitfalls

Many CEOs are hesitant to undertake I.T. changes because of past experiences of failed costly I.T. projects. There are several causes of I.T. failures, including:

1. I.T. purchases made based on cost alone not as part of a planned strategy.2. Overreliance on product vendors.3. I.T. purchases made by staff with little I.T. expertise.4. Not viewing I.T. as a strategic tool.5. Lack of employee training and buy-in.

Source: BDC Ebook: Profiting from technology

Leveraging I.T. to Unlock Business Value

With increasing innovation, the market has an abundance of I.T. options that any business can take advantage of. It can be overwhelming, and it is easy to make a mistake. Such mistakes would have a detrimental impact on your business.

To get the most value from any I.T. investment, it is important to develop

the right strategy and choose the right I.T. tools. In addition, it is critical

to have a clear plan for implementation.

It has to be a collaborative effort.

Executives need to work with I.T. executives and experts to examine

business processes and identify opportunities where I.T. can be

leveraged to increase profit. This can be by increasing revenue, reducing

costs, improving efficiency, enhancing customer experience, and/or

growing market share.

Often, businesses may be ill-equipped to successfully figure out the most cost-effective and profitable way to incorporate I.T. Using the help of experienced I.T. providers can make the process as painless and as easy as possible.


Profit is the difference between revenue and costs. When you improve your revenue and reduce your costs, the end result is increased profit. Revenue is the result of price and volume. Hence price, product and service mix, and cost are three key profits drivers that a business can influence to improve EBIDTA.

Chapter 4Increasing Profit to Improve EBITDA

Getting the Price Right

One of your company’s greatest profit drivers is the price of your products and services. Setting the right price is one of the most effective ways of improving your EBITDA.

According to Mckinsey’s “Turning Pricing Power into Profitability,” many companies “overlook pricing as a driver of earnings growth.” In their analysis of over 1,000 pricing intelligence initiatives, they found that efforts to improve pricing translated to a 2–7% increase in return on sales.

A weak pricing strategy erodes your company’s profitability. It is an indicator that money is being left on the table. Your price must be set so as to improve profitability. It should not be too high or too low. It is important to get a good understanding of your market price elasticity so as to determine your business pricing actions.


Seal Your Revenue Leaks

Discounts, promotions, and giveaways are incentives offered by companies to improve sales. Such incentives usually result in driving sales volume, but many times erode profits. They result in revenue leaks, which makes it difficult for a business to break even.

The Kini Group lists three ways in which discounting can go wrong:

The wrong product and service mix will erode your company’s EBITDA. A business can have several products and services, but some could be underperforming. As a result, they deteriorate the return on investments and wipe out profits gained by better-performing products and services.

Such products or services incur costs and resources which can be channeled toward a more profitable mix. A detailed analysis of your customers, revenue, markets, and margins per product and service will assist in the development of the right product and service strategy. This can help identify what to eliminate and where to focus sales efforts.1. Your products and services are devalued: discounts can make your

product or service seem too cheap. Any time you cut your price, you devalue your product or service in the eyes of your customer.

2. The effect of discounts is that in the long run, your customers will be unwilling to pay more for your product or service. Customers

who are used to getting a deal will not be happy when asked to pay more.

3. Giving the same discount to all customers makes you miss out on profits. Discounts should be tailored based on the volume your customer is buying. However, proper analysis needs to be done since large volume does not directly translate to profits.

Determining the Right Product and Service Mix

The mix of products and services you offer your customers has a direct impact on the revenue generated by your company. Many businesses believe that having a wide array of products and services results in increased sales and profits. This is not necessarily the case.

BCG has developed a matrix to assist companies in analyzing and characterizing their products. This matrix groups products as follows:

Stars – These are products that hold the biggest market share and bring in a lot of cash.

Cows – These are cash cow products which deliver the best revenue for the company.

Dogs – These include failed products that need to be eliminated.

Question marks – These are products whose future is uncertain. They have not failed but have not attained star or cash cow status.

Source: Rescue A CEO

Seizing Opportunity for Cost-Effectiveness

Now, let us turn to the cost side of the financial statements.

A sure way of improving EBITDA is to take advantage of opportunities for cost-effectiveness.

Cost-effectiveness does not necessarily mean staff reduction, closing offices, or freezing spending. Cost-effectiveness means looking for opportunities to close gaps in the production of a company’s service or product.

A well-implemented cost reduction plan will have a direct impact on increasing the EBITDA. Cost reduction plans can include a combination of the following:

1. Analyzing your costs and understanding the cost drivers. Such an analysis will help you to determine which cost drivers can be controlled and the degree of control you have as

a company. Examples of such control measures include renegotiating contract terms with suppliers and making it compulsory for the management team to provide business case justification for expensive costs.

2. Identifying ways of improving business process efficiencies. Complex processes slow down business and increase bureaucracy. Evaluating business processes with an aim to optimize costs will go a long way in reducing costs. Examples of such initiatives include eliminating non-value adding tasks, standardizing processes across the business, accelerating decision making, and removing duplications and redundancies.

3. Taking advantage of technology and automation. The future of cost management is linked to technology. According to a “Global Cost Survey Report” written by Deloitte, automation and technology have been found to be key enablers in attaining new levels of operating efficiency and fundamentally reshaping entire industries.

As an executive, there are various ways you can use automation to reduce costs; for example,

adopting virtual technologies that can allow employees to work remotely including mobile devices, cloud computing, key process automation, and business integration.

The aim is to ensure minimal waste and expense without affecting the quality of the product or service.



Improving Profitability

Growing your EBITDA will most likely involve a combination of all the above strategies.

EBITDA remains an important valuation and performance metric used by investors, analysts, and financiers. A good EBITDA reflects good performance and results in a better valuation of your company.

Every business leader who is serious about their company performance and valuation should actively track their EBITDA. Therefore, the next time you review your financial statements, take time to analyze your EBITDA and ask yourself, what more can I do to make it better?

A critical first step is to re-examine the various components of your business, understand the profit and cost drivers, and then address each, one at a time.

A company that takes the trouble to improve its EBITDA will create opportunities for long-term growth and success.

Conclusion – Turning EBITDA into Value


About JMARK Business Solutions

JMARK specializes in providing I.T. solutions that reduce costs, mitigate risks, increase innovation, outmaneuver the competition, and increase profits. We take a holistic approach in helping companies optimize technology to increase EBITDA. Our wide array of technology solutions will help you:

Use I.T. to better focus your energy.

Leverage technology to conquer your industry.

Analyze your data to reveal your future.

Make I.T. be a catalyst to get into your “mojo zone.”

We want to hear from you!

Contact us or give us a call at 844-44-JMARK to learn more about how our services and experience can drive your business EBITDA.

People First. Technology Second.

For thirty years, JMARK has been providing innovative I.T. solutions to organizations of all sizes. With all that experience comes extensive expertise. We understand the challenges that modern businesses face and can help you maintain continuity and efficiency, even in the midst of the continual changes occurring in technology needs and expectations. It is our mission to ensure that your technology supports your vision and goals.

Most importantly, at JMARK, we put people before technology. Everything we do, every service we offer, is a reflection of our “People First, Technology Second” philosophy. Because while we love technology, we also understand that I.T. is only useful when it serves to empower people and enhance the work they do; work that, in turn, can facilitate growth, spur innovation, increase opportunity, and open up new paths to success.

Contact JMARK today and let us show you what our I.T. services can do for your business.

844-44-JMARK | [email protected] | JMARK.com


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