What is EBITDA and what to include as a SaaS Business?
When running a SaaS business, understanding EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) is crucial for evaluating financial performance and operational efficiency. It provides insight into profitability by excluding non-operational expenses.
EBITDA differs very subtly from Operating Profit by excluding Depreciation and Amortisation too, but why should you really use it? Because this is what the industry AND your potential Investors discuss, a lot.
What is EBITDA?
EBITDA measures a company’s operating performance by stripping out non-cash expenses and financial costs. It helps SaaS businesses compare profitability across companies without the impact of different tax structures, financing choices, or accounting decisions.
The formula is as follows: EBITDA = Gross Profit – (Sales & Marketing + Salaries + IT + Office Costs)
What to Include in EBITDA for a SaaS Business?
Since SaaS businesses primarily operate on a subscription model with minimal physical assets, EBITDA adjustments focus on operational and financial efficiency. Here’s what should be included:
1. Gross Profit
- You need to include your Gross Profit figure first. You can read more about Gross Profit, here.
2. Sales & Marketing costs
- This would include all Digital Marketing, Events, and Exhibitions, et cetera
3. Salaries & People
- Anything and everything people related here, please. This would include National Insurance, Pensions, Consultants, Contractors, Training …
- You may choose not to include Sales Commissions, specfically if you have chosen to include within your Gross Profit figure.
4. IT Costs
- Any non-direct IT costs should be included. This is your G-Suite, Xero, Apollo, type costs.
- You would also include Telephone and Broadband costs here too.
5. Office & Other
- Office would include Rent, and Business Rates
- ‘Other’ would include anything not covered above including Accounting, Legal, Subscriptions …
Why EBITDA Matters for SaaS Businesses
A strong EBITDA margin reflects an efficient SaaS business model, allowing for a better valuation, investor confidence, and strategic decision-making. SaaS companies with high EBITDA margins often demonstrate strong revenue retention, cost discipline, and scalability.
By analysing EBITDA, SaaS founders and investors gain a clearer picture of a company’s true profitability, helping guide decisions on growth strategies, funding, and acquisitions.
This post was written by Christopher Grubb. You can find out more about me here.
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I hope the above has helped.
The role of the Finance Director does not need to be a full-time overhead for someone to be committed and make a difference to your business. My aim is to simplify the financial performance, planning and strategic positioning for SaaS and Tech businesses who just want their world to be uncomplicated and thrive.
Please feel free to message me with any comments or questions. Or find me on LinkedIn here.
