How much cash does a business really generate for its owners? In 2025, as the Australian business landscape faces tighter lending conditions and evolving tax policy, the old standbys like EBITDA are no longer enough. Increasingly, savvy owners and investors are turning to Owner Earnings Run Rate to get a more accurate—and actionable—picture of business health.
What Are Owner Earnings and Why Should You Care?
Originally popularised by Warren Buffett, owner earnings aim to reveal the true cash flow available to business owners after accounting for all necessary costs—including the pesky but critical capital expenditures (capex) that keep the business running. Unlike accounting profits, owner earnings cut through the noise of non-cash expenses and one-off adjustments.
In Australia, this metric is rapidly gaining traction for business buyers, sellers, and SME lenders. Why? Because it answers the question: How much real, spendable cash is this business throwing off each year?
- Investor clarity: It strips away accounting gimmicks, showing actual free cash flow.
- Lending confidence: Banks and fintech lenders increasingly request owner earnings figures for loan applications, especially after APRA’s tightening of lending criteria in early 2025.
- Succession and sale: Owner earnings help set realistic valuations for business exits, reflecting the cash a new owner can expect.
How to Calculate Owner Earnings Run Rate
The calculation takes a bit of legwork but pays off in insight. Here’s the formula:
Owner Earnings = Net Profit + Depreciation & Amortisation – Capex – Changes in Working Capital
But what about the run rate? It’s the annualised version, adjusting for seasonal or one-off events to reflect a sustainable yearly figure. This is especially relevant in 2025 as many businesses are still smoothing out pandemic-era volatility.
Example: Let’s say a Melbourne manufacturing firm reports the following for the first half of FY25:
- Net Profit: $200,000
- Depreciation & Amortisation: $60,000
- Capex (maintenance, not growth): $40,000
- Increase in Working Capital: $20,000
Owner Earnings for 6 months = $200,000 + $60,000 – $40,000 – $20,000 = $200,000
Run Rate (annualised) = $200,000 x 2 = $400,000
This gives buyers, lenders, and owners a credible baseline for cash flow projections in 2025.
Why Owner Earnings Run Rate Matters in 2025
The Australian business environment is evolving fast:
- Lending scrutiny: With APRA’s 2025 risk-based lending rules, banks want to see reliable cash flow—not just accounting profits.
- Tax and compliance: The ATO’s new focus on SME deductions and capex reporting means that transparent cash flow calculations are more important than ever.
- Business sales: M&A activity in sectors like healthcare, tech, and trades is surging, with buyers demanding hard evidence of sustainable owner earnings.
Consider the recent acquisition of an Adelaide-based HVAC company. The buyer insisted on an owner earnings run rate analysis to validate post-pandemic demand and ensure equipment capex wasn’t understated. The result? A smoother sale and a price both parties trusted.
Making Owner Earnings Work for Your Business
Getting the most from this metric means:
- Track capex diligently: Separate true maintenance capex from growth investments—only the former counts in owner earnings.
- Normalise for one-offs: Adjust for irregular expenses or windfalls to get a steady-state run rate.
- Monitor working capital swings: Big inventory purchases or late receivables can distort the picture. Smooth these over a typical year.
- Use it in negotiations: Present a transparent, credible owner earnings run rate to buyers, lenders, or partners to build trust and unlock better deals.
Owner earnings run rate isn’t just for big business. Whether you’re running a Sydney café or a Queensland trades business, it’s the number that can help you understand, value, and grow your operation in 2025.
