Debitoor Dictionary

Accounting terms explained in a simple way

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EBIT – What is EBIT?

EBIT is a widely used acronym in accounting that stands for: ‘Earnings Before Interest and Tax’

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Essentially, EBIT is the earnings of a business before interest and tax. It is therefore also referred to as ‘operating profit’. The result of the EBIT is an important figure for businesses because it provides a clear idea of the earning ability.

A company’s EBIT removes the expenses encountered in tax and interest in order to provide a base number for the earnings.

Why EBIT is relevant

For businesses looking to attract investors or potential buyers, the EBIT can provide an indication of the company’s earning potential; a crucial figure for understanding the value that shares in that business provide at a maximum level of performance.

How to determine your EBIT

There are two different formulas for calculating EBIT. They are: Revenue - Operating expenses or Net income + Interest + Tax

When producing your month end accounts part of the package of reports you will produce will be your Profit and Loss statement, also referred to as your income statement.

This lists your Revenue or Sales, then your cost of sales, so any items which have been brought in by the company to sell on or assist in the manufacture of your product in order to sell on to your customers. Your revenue less your cost of sales will give you your gross profit.

You would then list what is referred to as your indirect costs and your overheads. These would normally encompass the marketing costs, any samples of your products you may have given to customers and any wages you would have paid out to your workforce if you have manufactured your product.

Your overheads consist of salaries, rent, utilities and running costs of your staff and your office. These two categories would normally be totaled together. Your gross profit would then be deducted from this total to give you your operating profit or EBIT (earnings before interest and tax).

EBIT and Debitoor

Accounting and invoicing software like Debitoor gives you the tools to manage your invoicing, record payments for products or services, and register expenses and stay organised easily with automatic bank reconciliation.

Accounting software provides you with a constant overview of your business, allowing you to quickly access the figures you need to determine your company’s EBIT.