What the Heck is EBITDA? A Simple Guide for Handmade Sellers

Understanding Profitability Metrics Without the Jargon

You’ve heard the term thrown around in business circles and maybe even seen it in articles or financial reports, but let’s get real: what the heck is EBITDA, and why does it matter for your handmade business?

For handmade sellers, focusing on creative and product-focused tasks can feel way more exciting than diving into financial metrics. But here’s the thing—understanding key metrics like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) can actually help you make better decisions, track your profitability, and ultimately, grow your business.

Let’s break it down in plain English!

What is EBITDA, Exactly?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s a way to measure a company’s profitability by focusing on its core business operations and ignoring external factors like taxes or interest payments. For handmade sellers, think of it as a clearer way to see how much money your business is making purely from selling products, before accounting for other expenses that don’t directly tie to production or sales.

Why Should Handmade Sellers Care About EBITDA?

You might wonder, “Do I really need to know this if I’m not a big company?” The answer is yes, because EBITDA gives you insights into the financial health of your business.

Here’s why it matters:

Shows Your True Operational Profitability
EBITDA helps you see if your day-to-day operations are actually profitable. It strips away factors like interest or taxes that aren’t part of your main business activities, so you get a real picture of how well your core business is doing.
Helps You Understand Cash Flow
By ignoring non-cash expenses like depreciation, EBITDA is a decent proxy for cash flow—essential for handmade sellers who need a steady cash flow to fund production, purchase materials, or invest in marketing.
Useful for Benchmarking
EBITDA is a common way to compare your business against others in the industry. Even if you’re not selling millions, it’s valuable to see where you stand in terms of profitability and growth potential.

How Do You Calculate EBITDA?

Calculating EBITDA is simpler than it sounds. Here’s a basic formula to get you started:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

In a practical sense, here’s how you might break it down:

Start with Your Net Income (your profit after expenses).
Add Back Interest (if you’ve borrowed funds for business).
Add Back Taxes (state or federal taxes on your earnings).
Add Back Depreciation and Amortization (if you have any assets that lose value over time, like equipment).

For most handmade sellers, this might seem like a lot, but don’t worry if you don’t have all of these categories. If your business is more straightforward, you can simply use the “net income + interest + taxes” portion to get an idea of your operational earnings.

Real-World Example for a Handmade Seller

Let’s say you’re running a handmade candle business and want to know if your operation is profitable beyond the day-to-day expenses.

Here’s a simplified example:

Net Income: $10,000
Interest: $500 (you took a small business loan)
Taxes: $1,000
Depreciation: $200 (for equipment)

EBITDA=10,000+500+1,000+200=11,700

In this case, your EBITDA is $11,700. This means that if you focus on your core operations, you’re earning $11,700 before factoring in outside expenses.

What EBITDA Can’t Tell You

While EBITDA is useful, it’s not a magic number. It doesn’t tell you everything about your financial health:

Doesn’t Include All Expenses: EBITDA excludes costs that still impact your cash flow, like loan payments or capital expenses.
Not a Measure of Cash: It’s often mistaken for cash flow, but EBITDA doesn’t include every cash outlay, so be mindful of that distinction.

For a full picture, pair EBITDA with other metrics like cash flow or profit margins.

Key Takeaways for Handmade Sellers

Understanding EBITDA gives you a clearer view of your business’s operational profitability, helping you make smarter decisions without needing an accounting degree. Even if your business is small, using metrics like this will help you make informed choices, understand your true profitability, and show where you might improve or adjust your costs.

EBITDA might sound intimidating, but it’s really just a tool to help you grow your business sustainably. And as you continue on your journey as a handmade seller, it’s a handy way to ensure you’re building a profitable, thriving brand.

Ready to dig deeper into your numbers? Give EBITDA a try and see what it reveals about your handmade business!