EBITDAC: Earnings Before Interest, Taxes, Depreciation, Amortization and Covid-19

Covid-19 has been a black swan event that has derailed many companies in 2020 and into 2021.  EBITDAC has become part of the finance vernacular.  Since there are signs that the pandemic’s affects may be lessening in the short-to-medium term, it is important to start projecting normalized EBITDA and calculating trailing EBITDAC.   

Managing a business during Covid has required flexibility, and increased communicativeness with vendors and employees.  Measures taken to ameliorate these important stakeholders should also factor into EBITDAC.  As such, EBITDAC is not just a finance department concept and should factor input from other groups.

Owners, banks and other constituents require a full grasp of EBITDAC and normalized forward EBITDA so they can make appropriate decisions.              

Key Steps in Calculating EBITDAC

·        Develop a product line profit and loss statement and segregate the COVID 19 loans and related expenses.

o   PPP Loans:  The forgiveness should be clearly outlined.

o   Covid-related expenses:  Like PPP forgiveness,  the additional expenses must be clearly outlined and explained.  What expenses are likely short-term and should go-away?  Below is an example of expenses related to Covid-19:

§  Short-term:  The plexiglass, the six-feet of separation for workstations and points-of-sale and extended queuing line may not be long term. Cafeteria and restroom modifications and cleaning may eventually dissipate.

§  Beyond short-term:  The supply chain has likely changed due to the Covid-19.  The Covid has demonstrated the need to not single source key product.   Additional logistical costs and loss of volume discounts could be features beyond the short-term.  There are macro events tangentially related to the Covid-19 like the “Buy American” push from politicians which will impact sourcing decisions and lead times.

EBITDAC Requires Input Beyond the Finance Department

Managing through the Covid has required finesse, empathy and listening to your employees and customers.  EBITDAC to extent possible should be explained to accurately capture these nuances.

A restructuring colleague of mine, Ed Bidanset, added the following examples:

Employee Angle Example

“During the last 12 months, I managed a manufacturing company that had an employee call OSHA and file a complaint because he felt we had failed to comply the guidelines. At that point, OSHA had not issued complete guidelines in early April 2019 for COVID 19. After the audit, they told us we had done everything they would suggest and complimented us on our efforts.  The lesson is that being proactive may have entailed upfront costs but ultimately pays off.  Listening and being responsive to employees improves ability to work together through the Covid issues.”   

Customer Angle Example

“During the last 12 months, we also began Monday morning customer calls to discuss the queuing of customer orders in our production schedule. This allowed us real time input from our customers as to who could wait another week and who needed product today. On one call, we even discussed the shortage of PPE and the potential need to close down for a few days until we could acquire more PPE.  The customer on the call had extra PPE and within 24 hours had shipped us enough to prevent the shutdown.”

In both the employee and customer example, additional costs and additional communication were incurred that ultimately were pivotal in getting through the worst of the situation.

Conclusion

Getting a full grasp of EBITDAC and normalized EBITDA going forward is critical.  EBITDAC cannot and should not be calculated solely based by the finance department’s input. Input from other departments in the company should be factored in when calculating EBITDAC and normalized forecasted EBITDA.

Understanding EBITDAC and projected normalized EBITDA will be important in communications with internal and external stakeholders.