Monday, May 01, 2006

First monthly earning report

Before I state my April earnings. I am going to explain my accounting method, which is derived from EBITDA.

EBITDA is a common accounting method used by corporations. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is an indicator of a company's financial performance which is calculated as follows:

= Revenue - Expenses (excluding tax, interest, depreciation and amortization)

EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.

EBITDA first came into common use with leveraged buyouts in the '80s, where it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector, even when it isn't warranted.

A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company's earnings.

My method of accounting will be called EAITDA (Earnings After Interest, Taxes, Depreciation, and Amortization). It eliminates all the problems discribed above.

My EAITDA for the month of April is $1240*. Therefore, My networth (excluding my primary residence) on May 1st is $25,330.

Note 1: This figure excludes any accumulation of equity in my primary residence.
Note 2: This figure is subject to revisions after I file for my income taxes.