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You’ve got a vision for starting your own small business, and you’re far from alone. In July 2024, 34.7 million small businesses in America employed a number of workers that ranged from just 1 person to 500.

For the last 25 years, small businesses have been gaining steam. It’s clear that more Americans than ever want to quit working for others and become entrepreneurs. The number of such firms just keeps increasing, from 15.4 million in 1997 to 26.5 million in 2018 and on to today’s total.

While it’s an exciting trend and these numbers pack a wallop, you might also be wondering, “Ok, but what about inflation… supply chain … hiring shortages…?” It seems like there’s nothing but obstacles to launching a business right now—or if you have a business still in early stages, to keeping it alive.

There’s no question that challenges exist to starting and running your own small business. Why else would nearly one in five U.S. businesses fail within the first year?

However, what you might not know is that small businesses showed undeniable strength in startup numbers even during the worst of the COVID-19 pandemic. And post-pandemic, many businesses are reaching for success with more determination than ever, including seeking out funding for business.

Read on for insights, interviews, facts, figures, and tips for starting a small business that will help give you the best shot at success.

Recommended: Unemployment Rates By City in 2024

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State of Small Business in 2024

If you assumed that the pandemic threw cold water on people’s initiative to start a new business, you’d be mistaken. By 2021 the number of new businesses registered was soaring, and that trend held.

On average, there are 4.7 million businesses started every year. That average is from the past five years of business formation data in America. According to data from the US Census Bureau, the nearly 5.5 million businesses started in 2023 is the highest year on record, beating out the previous record of 5,380,477 new businesses started in 2021.

The total number of businesses started in 2023 also represents a 56.7% increase from the number of new businesses in 2019.

Small business financing represents definite challenges, especially when interest rates are high. Different sources for funding exist, from crowdsourcing to a business line of credit.

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Small Business: Regrouping and Moving Forward

The most popular types of business started are food service, health care, arts and entertainment, website design, auto repair, real estate, and pet services.

Here is the portrait of entrepreneurship in 2024, according to the SBA’s Office of Advocacy:

•  99.9% of businesses are small.

•  Small businesses employ 45.9% of American workers, or about 59 million people.

•  Small businesses are 43.5% of GDP.

•  Small businesses pay 39% of all private sector payroll.

•  26.5% of federal contracting dollars went to small businesses in FY 2022.

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Is It an Idea or an Opportunity?

People who’ve studied small business failure rates say that, unfortunately, some weaknesses are baked in from the beginning—it often goes back to the idea for the business.

Being an entrepreneur holds great allure. For many of us, it’s irresistible.

But before you take the plunge, it’s important to make sure your vision for a business is precisely that: a business. Ken Colwell, author of the bestselling book Starting a Business: QuickStart Guide, writes that aspiring entrepreneurs must make sure their idea is an opportunity and one that can be executed.

“Opportunities are actionable, and they have the potential to provide value both to you and the customer,” Colwell writes.

Instead of wracking your brain for an idea that will explode into overnight multi-million-dollar success, when coming up with a small business idea, try to focus on solutions to existing problems. Colwell says, “Simple solutions to common problems have a higher potential for success.”

According to Colwell, a great opportunity has these qualities:

•  Solves a problem for a customer

•  Exists in a space that isn’t too crowded

•  Can be executed in a strategic space where you will hold an advantage

•  Fills a critical customer need that may not be obvious to them

•  Is not obvious to people who don’t have your background, experience, or insight

💡 Recommended: Small Business Startup Grants

Starting a Small Business: The 10 Essential Steps

Ok, so say you’ve come up with your perfect opportunity, and you feel ready to launch. Now you’re truly ready for those tips for starting a small business.

To mistake-proof your business idea, it’s crucial to follow best practices. A lot of people have a dream, but they may lack financial background and experience. To help, the SBA offers many mentorship programs, as do other organizations.

Here, based on the agency’s years of experience, are the SBA 10 Steps to Success:

1. Conduct Market Research

Is your idea really a business? You must gather information about potential customers and businesses already up and running in your area. Use that information to find a competitive advantage.

2. Write Your Business Plan

Your business plan is a roadmap for how to structure, run, and grow your new business. You’ll use it to convince people that working with you—or investing in your company—is a smart choice.

3. Fund Your business

Your business plan will help you figure out how much money you’ll need to start your business. If you don’t have that amount on hand, you’ll need to either raise or borrow the capital. You’ll want to explore startup loans for small businesses.

4. Pick Your Business Location

You’ve heard it before: Location, location, location. Whether you’re setting up a brick-and-mortar business or launching an online store, the choices you make could affect your taxes, legal requirements, and revenue.

5. Choose a Business Structure

The legal structure you choose will impact your business registration requirements, your taxes, and your personal liability.

6. Choose Your Business Name

Don’t skimp on the effort put into this one. You’ll want a name that reflects your brand and captures your spirit. And make sure your business name isn’t already being used by someone else!

7. Register Your Business

Congrats, you’ve picked the perfect business name. Now it’s time to make it legal and protect your brand. If you’re doing business under a name different from your own, you’ll need to register with the federal government and maybe your state government as well.

8. Get Federal and State Tax IDs

You’ll use your employer identification number (EIN) for important steps to start and grow your business, like opening a bank account and paying taxes. It’s like a social security number for your business. Some states require you to get a tax ID as well.

9. Apply for Licenses and Permits

Keep your business running smoothly by staying legally compliant. The licenses and permits you need for your business will vary by industry, state, and location.

10. Open a Business Bank Account

A business checking account can help you handle legal, tax, and day-to-day issues. It should be easy to set one up if you have the right registrations and paperwork ready.

Recommended: Steps to Starting a Small Business

The Takeaway

New businesses are being launched in record numbers. Running your own business, you’ll want to make sure you have enough funding available. Small Business grants can be essential, and crowdfunding is turning into a make or break for businesses.

If you’re interested in exploring small business financing, SoFi’s marketplace can help you compare options and get fast funding.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Photo credit: iStock/Bill Oxford

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
This content is provided for informational and educational purposes only and should not be construed as financial advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q424-023

EBITDA (earnings before interest, taxes, depreciation, and amortization) is often used as an alternative to net income to measure a company’s profitability. By eliminating the effects of financing and accounting decisions, EBITDA is designed to zero in on a firm’s operating performance without the impact of its capital structure.

Here’s a closer look at EBITDA, including how it works, how it’s calculated, and what this performance metric can tell you (and others) about your business.

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What Is EBITDA?

EBITDA is an earnings metric that is commonly used to measure a company’s financial health and ability to generate cash. The formula takes net income then adds back certain expenses — interest on debt, tax payments, and noncash depreciation/amortization costs — to better assess a firm’s operating performance.

EBITDA isn’t recognized by the Generally Accepted Accounting Principles (GAAP) and typically doesn’t appear on the income statement. However, proponents of this metric believe it presents a clean picture of a company’s core profit by stripping away extraneous factors that can vary depending on a company’s capital structure and location.

What Is It Used for?

Business owners will often calculate EBITDA on a monthly or quarterly basis to see how their company’s raw earnings change over time.

Investors frequently use EBITDA to compare a company’s performance to its competitors. Unlike net income, this metric enables investors to look at companies based solely on their operations, excluding the impact of taxes, amounts of debt, and the cost of their capital investments. This allows for a more apples-to-apples comparison.

If you’re in the market for small business financing, a lender may look closely at your company’s EBITDA, since it represents the cash flow generated by the business that is available to make loan payments. Generally, a firm with a strong history of consistent and growing EBITDA will find it easier to get a business loan at favorable rates and terms.

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EBITDA Formula

There are two EBITDA calculation formulas — one uses net income as the starting point, while the other uses operating income as the starting point.

Net Income

The formula for calculating EBITDA using net income is:

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

Net income is calculated by subtracting all expenses from total revenue. This includes everything from the cost of goods sold (COGS) to interest and tax payments. In order to calculate EBITDA, you need to add back business loan interest and tax line items. In addition, you need to add back depreciation and amortization expenses.

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Operating Income

The formula for calculating EBITDA using operating income is:

EBITDA = Operating Income + Depreciation & Amortization

Operating income is, as the name suggests, the money a business makes from its operations. It’s the amount of money that remains after operating expenses and COGS have been deducted from total revenue.

Operating income, or profit, is found in the middle of the income statement. Tax and interest expenses are already excluded, so you just need to add back depreciation and amortization.

The two EBITDA calculations can potentially yield different results as net income includes line items that might not be included in operating income, such as non-operating income or one-time expenses.

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Breaking Down the EBITDA Formula

Here’s a more in-depth look at each part of the EBITDA calculation and why it’s included in the above formulas.

Net Income

Net income is profit as opposed to revenue. Also known as net profit, it’s the amount of money a company makes over a period of time after it accounts for all of its expenses incurred over that same period. It is the “bottom line” on the income statement and shows what’s left after subtracting all expenses from total revenue, including COGS, operating expenses, non-operating expenses, taxes, interest, and all other expenses.

Interest

Interest expense is the cost of borrowing money for business activities, such as taking out various types of business loans. Because how a business raises capital can vary widely, interest payments can differ significantly from company to company. Variations in how a company chooses to finance its activities (known as its capital structure) makes comparing business operations difficult. For that reason, interest is removed from consideration here.

Taxes

Taxes for EBITDA are the taxes paid by businesses, including income taxes, excise taxes, and employment taxes. Each locality has different tax laws, which means that tax payments can vary from one company to another. Since tax obligations aren’t uniform, they’re taken out of consideration in the EBITDA calculation.

Depreciation

Depreciation is the process of spreading out the cost of a tangible asset over the course of its useful life. While depreciation does cost a business money (as machinery and vehicles do wear out), it’s a non-cash expense that depends on past investments the company has made and not on the current operating performance of the business. Therefore, EBITDA doesn’t factor it in.

Amortization

The key difference between depreciation vs. amortization is that amortization involves the depreciation of intangible items, such as patents or licenses, which also have a limited useful life due to expiration. While amortization is an expense that is reported on a company’s financial statements, it isn’t directly related to a business’s core operations, so EBITDA doesn’t factor it in.

Operating Profit

Operating profit — also called operating income — is the result of subtracting a company’s operating expenses from gross profit. A business’s operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities. It does not consider interest or tax expenses but does include the non-cash charges of depreciation and amortization, so those must be added back to arrive at EBITDA.

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Example of the EBITDA Calculation

Let’s use fictional company ABC as an example of the EBITDA calculation. ABC has a net income of $10 million in a year. Also on the income statement are the following items:

Interest expense: $500,000

Tax expense: $1,000,000

Depreciation & amortization expenses: $400,000

To find EBITDA using the net income formula, you simply add interest, taxes, and depreciation & amortization expenses back to net income:

EBITDA = $10,000,000 + $500,000 + $1,000,000 + $400,000

EBITDA = $11,900,000

While ABC’s net income is just $10 million, EBITDA is higher after adding back those costs.

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EBITDA Margin

EBITDA margin measures a company’s earnings before interest, tax, depreciation, and amortization as a percentage of the company’s total revenue. As a result, it can tell you what percentage of each dollar earned in revenue is making its way into EBITDA.

Generally, the higher the EBITDA margin, the less risky a company is considered financially.

The formula for calculating EBITDA margin is:

EBITDA Margin = EBITDA / Total Revenue

Like the EBITDA number, EBITDA margin can be used to compare a company’s financial performance to that of others within the same industry.

Recommended: Revenue vs EBITDA Explained

The Takeaway

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This earnings metric is often used in place of net income to analyze and compare profitability among companies, as it eliminates the effects of financing and accounting decisions. Like all performance indicators, EBITDA is generally best calculated in tandem with other metrics that help business owners, investors, and lenders understand the whole picture of a business’s health.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the formula for calculating EBITDA?

EBITDA (earnings before interest, taxes, depreciation, and amortization) can be calculated in one of two ways:

Method #1: EBITDA = Net Income + Interest Expense + Taxes + Depreciation & Amortization

Method #2: EBITDA = Operating Income + Depreciation & Amortization

What would be considered a good EBITDA?

A “good” EBITDA (earnings before interest, taxes, depreciation, and amortization) will depend on the company and the industry. EBITDA alone does not reveal how profitable a company is. To learn from a firm’s EBITDA number, you’ll want to compare a company’s EBITDA over various periods or to a competitor’s EBITDA.

What taxes does the EBITDA calculation include?

Taxes included in EBITDA (earnings before interest, taxes, depreciation, and amortization) are all taxes paid by businesses, including income taxes, excise taxes, and the company’s share of employment taxes.

Photo credit: iStock/Nastassia Samal

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q424-049

The working capital cycle describes the flow of money in a business, from its suppliers to its customers. It includes all the steps in the production process — buying raw materials, processing them, selling finished goods, and collecting payment for those goods.

Generally, shorter working capital cycles are better than longer ones. If a business can sell their inventory quickly, collect customer payments on time, and pay their vendors for raw materials slowly, they’ll have better cash flow. A long working capital cycle, on the other hand, ties up cash for a longer period of time without earning a return on it.

Read on to learn what the working cycle capital is, how it’s calculated, and the difference between a positive and negative working capital cycle.

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What Is the Working Capital Cycle (WCC)?

The working capital cycle is the amount of time it takes to convert net working capital (such as current assets and current liabilities) into cash.

The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. Therefore, companies generally strive to reduce the working capital cycle by selling inventory faster, collecting payment sooner, and/or stretching accounts payable.

Small business loans, including working capital loans, can help businesses meet their short-term needs while waiting to collect payment from customers.

Components of the Working Capital Cycle

There are four key components of the working capital cycle.

Accounts Receivable

Accounts receivable are the funds that customers owe your company for products or services that have been received and invoiced but not yet paid for. A company needs to collect its receivables in a timely manner so that it can use those funds to pay it debts and cover its operating costs.

Accounts Payable

Accounts payable is any money a company owes to its suppliers or vendors for goods or services received but not yet paid for. Businesses generally try to balance payables with receivables to maintain maximum cash flow. Often a company will delay payment as long as they can while still maintaining good relationships with suppliers.

Inventory

Inventory is the product (or products) a company sells and is its main asset. How quickly a company can sell and replenish its inventory is a key measure of its success. Generally, you want enough inventory that you don’t lose out on sales, but not so much that you are wasting working capital.

Cash

A business needs to generate enough cash from its activities so that it can meet its expenses and have enough left over to invest in infrastructure and grow the business. If a company doesn’t generate adequate cash to meet its needs, it may have trouble conducting routine activities, such as paying suppliers and buying raw materials, let alone making investments or handling emergency expenses. Working capital loans can help bridge this gap.

Working Capital Cycle Formula

The working capital cycle formula includes three factors:

•  Inventory days: This refers to how quickly you can sell your stock. It includes the time you spend processing and manufacturing raw materials into products, as well as the time it takes to sell them to customers.

•  Payable days: This is how soon you have to pay suppliers for the stock or raw materials.

•  Receivable days: This is how long it is between selling your stock and receiving payment from customers.

To calculate the working capital cycle, you add the number of inventory days to your receivable days, and then subtract the number of payable days. The working capital cycle formula is:

Inventory Days + Receivable Days – Payable Days = Working Capital Cycle in Days

Calculating Working Capital Cycle

Here is an example of how to calculate the working capital cycle using a fictional business called Company ABC.
Company ABC follows this working capital cycle:

•  on credit. They have 60 days to pay for the materials (Net 60).

•  •  •  •  •  Working Capital Cycle = 56 + 30 – 60 = 26

This number is how many days the business is out of pocket before receiving full payment, and is what’s known as a positive cycle.

Positive vs Negative Working Capital Cycles

It’s normal for a business to have a positive working capital cycle and have a number of days where they are waiting for payment to give them available cash.

Companies that have a positive working capital cycle often need some type of business financing, such as a line of credit, invoice factoring, or accounts receivable financing, to hold them over until they receive payments from their customers and complete their working capital cycle.

A business with a negative cycle, by contrast, has collected money at a faster rate than they need to pay off their bills, which means the end number after using the formula is a negative number.

Negative working capital is common in some industries, such as grocery retail and the restaurant business. With these businesses, customers pay up front, inventory moves quickly, and suppliers often give 30 days credit. As a result, the business receives cash from customers before it needs to pay its suppliers.

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Pros and Cons of Shorter Working Capital Cycles

The Takeaway

The working capital cycle is the time it takes to turn current assets into cash. There are three key factors that affect your working capital cycle: the time needed to pay your supplier, the time needed to sell your inventory, and the time needed to receive payment for your sales.

It’s normal for a business to have a positive working capital cycle, meaning there is a delay between being paid by your customers and needing to pay your vendors. Many small businesses rely on working capital loans, such as short-term loans, invoice factoring, and merchant cash advances, to bridge temporary dips in working capital.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What are the 4 main components of the working capital cycle?

The four components of the working capital cycle are inventory, accounts receivable, accounts payable, and cash.

How is the working capital cycle calculated?

The formula for calculating the working capital cycle is:

Inventory Days + Receivable Days – Payable Days = Working Capital Cycle

Is the working capital cycle the same as the operating cycle?

Yes, the working capital cycle is also known as the cash operating cycle. Both terms refer to the number of days between paying suppliers and receiving cash from sales.

Photo credit: iStock/fizkes

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSMB-Q424-026

The best small business financial software can help you keep track of all the money coming in and going out of your business, as well as automate certain processes that, not so long ago, would use up a lot of a business owner’s time and energy.

If you’re thinking about investing in financial software for your business, read on. What follows is a closer look at how these programs work, their pros and cons, and how to pick the best software product for your small business.

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What Is Financial Software?

Small business financial software is a type of accounting software designed to meet the needs of small businesses. These programs can help you manage your accounts, track your revenue and expenses, and store your receipts and important financial documents. They can also keep you in compliance with tax law, help you prepare filings at tax time, and simplify the process of applying for a small business loan.

While features vary depending on the product, small business financial software programs typically use double-entry accounting. Most programs allow you to generate useful financial reports and integrate with other small business software and apps.

You can use small business financial software along with an accountant or in place of hiring an accountant. This type of software can be a worthwhile investment that accommodates the growth of your business over time.

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How Does Financial Software Work?

Financial software automates the process of managing and tracking your company’s finances. Typically, the software will sync with your business’ bank accounts and business credit cards, handle accounts payable and receivable, and track transactions (including credit card payments).

Business financial software can also store documents securely, generate quarterly reports, and reconcile data. Some of the fancier versions also offer services like payroll (or integration with a payroll company), multi-user access, inventory management, and financial forecasting.

Accounting software can be used in place of a hiring bookkeeper or accountant. However, if you’re not an expert in small business accounting, it may still be helpful to use a financial professional to help maintain and review your books, and make sure that all financial statements are prepared correctly.

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Pros and Cons of Using Dedicated Financial Software

Even the best accounting software options come with both pros and cons. Here’s a closer look at the advantages and disadvantages of using small business financial software.

Pros of Using Dedicated Financial Software

Reduces Errors

Accounting software can eliminate, or at least significantly reduce, common small business accounting errors. For example, if your journal entries don’t balance, the accounting software will flag it right away. This keeps minor mistakes from becoming larger ones, and can save you all that time you might have spent trying to figure out why your balance sheet doesn’t balance.

Automation Saves Time

With accounting software, you won’t have to spend time doing repetitive tasks (like manually entering every business transaction), fixing accounting errors, and creating financial reports. Both forecasting and creating a small business budget can often be done with the push of a button, as can many other calculations.

Can Cost Less Than Hiring an Accountant

While you don’t know what you don’t know when you first open a business, financial software can at least do a majority of your bookkeeping for you. Of course, an accountant can likely offer insights and advice you can’t get from a program. But if you’re on a tight budget, accounting software can give you most of the things you need.

At some point, you may still want to hire a Certified Public Accountant (CPA) for financial planning. But if you’re just getting your business off the ground, accounting software can be a good place to start.

Simplifies Tax Filings

Business financial software can be a big help when it comes to tax compliance. That’s because having accurate accounting records and up-to-date financial statements makes the process of collecting all the documents and information you need to file your taxes relatively easy.

Cons of Using Dedicated Financial Software

Can Be Difficult to Use at First

Financial software programs try to be as user- and non-accountant-friendly as possible. However, if you’re new to small business accounting, there will likely be a learning curve involved. Figuring out how to use — and keep up — with the software may take a fair amount of time and effort at the outset.

Lack of Human Support

While automation can save time and money, a software program will likely never be able to fully replace a live bookkeeper or CPA. Most financial software companies offer customer support, either online or over the phone, but the quality and availability can vary widely.

Requires Updates and Maintenance

Maintaining accounting software involves performing periodic upgrades to the accounting software package. It also means keeping all the necessary equipment — PC/laptop, internet connection/modem, backup drive, and operating system — up to date so it can properly run the program.

May Require Additional Purchases

Even if the financial software is free, there’s likely a paywall somewhere. Software companies will often charge for additional services like payroll, payment processing, technical support, and upgrades.

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5 Small Business Financial Software Choices

The best accounting software for small businesses helps you track your accounts and expenses and keep detailed, accurate books. Which program will serve your business best will depend on the industry you’re in and how many employees you have.

Here’s a look at five popular financial software options (based on a Google search of “popular small business financial software” in October 2024) that you may want to consider for your small business.

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Intuit QuickBooks

Quickbooks often appears on “best accounting software for small businesses” lists. While it can be pricier than its competitors, it offers multiple tiers to choose from, which means you may be able to find an option that fits within your budget.

QuickBooks offers numerous add-on apps, and also integrates with third-party software and apps. Thanks to the ubiquity of QuickBooks, there are many online training resources and forums to get support when needed.

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FreshBooks

FreshBooks is a solid, well-rounded accounting software choice. Freelancers and very small businesses will likely find it easy to use for basic money management, like sending invoices, accepting payments, tracking income and expenses, and monitoring financial accounts. FreshBooks can also be a great tool for budgeting projects, producing proposals or estimates, and tracking time or projects.

Zoho Books

Zoho Books is a user-friendly option that can meet all of your basic bookkeeping needs, including sending invoices, tracking expenses, generating reports, and reconciling accounts. It allows you to seamlessly connect to your bank account, payment processor, and e-commerce platform. Zoho Books even offers a free plan that allows you to send up to 1,000 invoices per year.

This software can be a great choice for small businesses that are already using Zoho products and services, as it integrates well with the company’s other Zoho apps. It can also be a good choice for small, service-based businesses.

Xero

Unlike many other financial software options, Xero allows business owners to add an unlimited number of users and to designate a different permission level for each. It also integrates with hundreds of other apps, as well as third-party payroll and payment services. In addition, Xero offers a variety of plans, so you can upgrade as your business grows.

Xero can be a great choice for small businesses that have multiple people who need to access the accounting software, as well as businesses that need a broad array of accounting and reporting tools.

Wave

Wave offers a free version that allows you to track income and expenses, send invoices, and access numerous financial reports, making it a good, cost-effective choice for sole proprietors and very small businesses. It also has a simple, understandable user interface that can appeal to financial newbies.

With integrated payroll and double-entry accounting support, Wave also offers small businesses some room for growth. However, it lacks features that larger and quickly growing companies may need.

Choosing a Financial Software Solution for Your Business

To determine the best financial software system for your business, you may first want to consider how many users you will want to have. If it’s just you and one or two of your business partners, any of the companies above will likely do. However, if you need a large number of people to be able to enter and access data, then you may want to consider a company that offers unlimited users.

Also think about what features you need. If you want everything, including payment and payroll processing, it can be a good idea to shop around and compare costs and features. The cheapest option may not be so cheap once you add on all the services you’re looking for. If you’re just looking for bare bones, then Wave’s free software program (which offers basic accounting and invoicing), may be all you need right now.

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The Takeaway

Financial software can help you accomplish your daily accounting tasks, including recording payments, tracking expenses, invoicing customers, and reconciling transactions, easily and all in one place. It can also help you monitor and manage your company’s financial health, and generate reports that analyze your business’s performance from different angles.

While using small business accounting software typically comes with a learning curve, it can be well worth the time and occasional headache to get yourself up to speed. By automating many of the tedious tasks associated with bookkeeping, you’ll have more time to focus on what’s really important – managing and growing your business.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

Which financial software do most small businesses use?

Intuit Quickbooks is one of the most widely used accounting software options on the market. Other popular and highly rated accounting software picks include: Xero, FreshBooks, Wave, Zoho Books, and Sage.

Do you need an accountant if you are using business financial software?

While accounting software can automate many of the services typically provided by an accountant (like basic bookkeeping and financial statements), having a professional accountant can still be beneficial. An accountant can provide expertise on tax planning, cost-cutting, and regulatory compliance that software typically cannot offer. Often the best solution is to use a combination of both.

Is there a financial software for business that is considered easier to use?

Xero and Wave are often cited among the easiest accounting software options to use, especially for freelancers and very small businesses. Wave even offers a free basic plan.

Photo credit: iStock/FG Trade

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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One way to measure your business’s profitability is to calculate its EBITDA margin. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and is used to assess a company’s operating performance. EBITDA margin compares a company’s EBITDA to its total revenue and is expressed as a percentage. The higher the EBITDA margin, the smaller a company’s operating expenses are in relation to their revenue, resulting in a more profitable enterprise.

EBITDA margin is often used as an alternative to standard measurements of profit margin. Proponents of EBITDA margin believe it offers a more accurate reflection of financial operations, since it removes the influence of expenses that may hide how a company is truly performing.

Read on to learn the EBITDA margin formula, why this accounting metric is important to know, and exactly what it can tell you about your small business.

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What Is EBITDA Margin?

To fully understand the EBITDA margin, you need to first understand EBITDA (earnings before interest, taxes, depreciation, and amortization). EBITDA is similar to net income except that it adds back certain expenses, including interest on any small business loans, income taxes, and non-cash depreciation and amortization costs. The purpose of adding these costs back to net income is to remove the factors that business owners have control over, such as debt financing, capital structure, methods of depreciation, and taxes (to some degree).

The EBITDA margin is a measure of a company’s operating profit shown as a percentage of its revenue. Like other margin ratios, EBITDA margin gives insight into a company’s ability to turn sales into a profit. It looks specifically at how well a business is doing before external influences like taxes are incorporated.

EBITDA Margin Formula

To calculate EBITDA margin, you divide the EBITDA number by total sales revenue. Here’s the formula:
EBITDA Margin = EBITDA / Total Revenue

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How Does EBITDA Margin Work?

The EBITDA margin tells you how much operating expenses are eating into your company’s gross profit. In other words: It reveals what percentage of each dollar earned in revenue is making its way into EBITDA. Generally, the higher the EBITDA margin, the less risky a company is considered financially. For this reason, a good EBITDA margin can make it easier to qualify for financing with favorable rates and terms.

EBITDA margin is also used by investors and analysts to compare the relative profitability of two or more companies of different sizes in the same industry. It’s important to note, however, that EBITDA margin is considered a non-GAAP financial figure, meaning it does not follow generally accepted accounting principles (GAAP).

EBITDA Margin Calculation

To calculate the EBITDA margin, you must first calculate EBITDA. You do this by taking your company’s net income then adding back taxes, interest expenses, and depreciation/amortization costs. Alternatively, you can calculate EBITDA by starting with your firm’s operating income (or EBIT), then adding back depreciation/amortization.

These formulas look like this:

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

or

EBITDA = Operating Income + Depreciation/Amortization

Once you know the EBITDA number, you divide it by total sales revenue to come up with EBITDA margin.​

Uses of EBITDA Margin & What It Tells Us

EBITDA margin tells you how efficiently a company is converting revenue into earnings (before interest, taxes, and depreciation/amortization are subtracted). If a company has a high EBITDA margin, it means that its operating expenses are lower in relation to total revenue. This can make it easier to qualify for many types of small business loans.

As a business owner, it can be useful to compare your company’s EBITDA margin to the EBITDA margins of previous periods in order to see any trends in profitability and/or gauge the effectiveness of cost-cutting efforts. You can also compare your company’s EBITDA margin to the industry standard. Generally, having a higher EBITDA margin compared to your competitors indicates that your company is producing higher profits from its core operations.

Analysts, investors, and lenders also use EBITDA margin to determine a company’s stability and long-term profitability. In addition, they may look at a company’s Debt/EBITDA ratio, which measures a company’s ability to pay off its current debt load.

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EBITDA Margin vs EBITDA Compared

Pros and Cons of Using EBITDA Margin

Alternatives to EBITDA Margin

EBITDA margin is one of many ways to calculate your business’s profitability and operational efficiency. Here are some others you may want to use.

EBITA

EBITA is earnings before interest, taxes, and amortization. It’s an alternative to EBITDA that does not back out depreciation. EBITA is used more commonly with firms that do not have large amounts of capital expenditures that might result in high depreciation expenses. Like EBITDA, EBITA is a non-GAAP performance metric.

EBIT

EBIT is earnings before interest and taxes. Like EBITDA, EBIT adds interest and taxes back to net income. However, EBITDA takes EBIT a step further by also adding back the non-cash charges of depreciation and amortization. If a company has high interest costs, it might choose EBIT over net income as a performance indicator. A capital-intensive company or one with substantial intangible assets (and amortization expenses), on the other hand, might go with EBITDA, since EBIT could make it look like the firm was incurring steep losses when, in fact, those were non-cash expenses.

Operating Margin

Like EBITDA margin, operating margin is a profitability ratio that owners, investors, and analysts use to evaluate a company’s ability to turn a dollar of revenue into a dollar of profit after accounting for expenses. Both operating margin and EBITDA margin measure a company’s profit after paying variable costs, but before paying interest or tax. EBITDA, however, also excludes depreciation and amortization expenses. Another difference is that EBITDA is not accepted by GAAP, while operating margin is.

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EBITDA Margin Example

Let’s look at an example of how to calculate a company’s EBITDA margin.
Company XYZ
Revenue: $5 million
Net income: $500,000
Interest expenses: $50,000
Taxes: $80,000
Depreciation and amortization expenses: $60,000
EBITDA = $690,000 (net income + interest, taxes, depreciation, and amortization)
EBITDA margin = $690,000/$5 million = 13.8%

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The Takeaway

EBITDA margin is a measurement of operating profit as a percentage of revenue. It is calculated by dividing EBITDA by revenue and expressed as a percentage. The EBITDA margin formula is commonly used to compare business performance across firms within the same industry. Lenders might also use EBITDA margin, along with other metrics, to assess the financial health of a small business applying for a loan. Business owners can use EBITDA margin to compare profitability from one accounting period to another and run their businesses more efficiently.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is considered to be a good EBITDA margin?

What’s considered a good EBITDA (earnings before interest, taxes, depreciation, and amortization) margin will vary by industry, as well as the size and growth stage of a business. But generally speaking, you want your company’s EBITDA margin to fall between 15% and 25%.

What’s the average EBITDA margin of businesses?

EBITDA (earnings before interest, taxes, depreciation, and amortization) margins vary by industry. So the best way to know how you stack up against your peers is to compare your company’s EBITDA margin to the average for your industry.

What’s the difference between EBITDA and EBITDA margin?

The difference between EBITDA (earnings before interest, taxes, depreciation, and amortization) and EBITDA margin is simply that EBITDA is a nominal earnings metric, while EBITDA margin presents earnings as a percentage of revenue.

Photo credit: iStock/LuckyBusiness

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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