Gross profit margin

As Previsio explains, gross profit margin is calculated by subtracting the cost of goods sold from total sales. It is therefore generally applicable to the manufacturing and retail sectors, but less so to the service sector.

For Nathalie Niemeyer, business growth training advisor at the École des entrepreneurs du Québec, gross profit margin is the basis.

"If it's not high enough, the company will have difficulty paying its operating costs," she explains. "Forecasts allow the entrepreneur to realize, for example, that he's paying too much for his materials and lead him to want to negotiate to reduce his price. By knowing his figures, he knows where to act."

As to how much the gross profit margin should be around, it varies greatly depending on the industry.

"For example, a new game console model must have a very high gross profit margin to absorb all the costs incurred in research and development," says Maxim Montminy, business growth training advisor at the École des entrepreneurs du Québec.

EBITDA (earnings before interest, taxes, depreciation and amortization)

To know your EBITDA, you have to take your gross profit margin and subtract your operating expenses. Taking the time to do this calculation can also wake up many entrepreneurs.

"Often, several fixed costs increase and entrepreneurs do not necessarily follow them closely, notes Nathalie Niemeyer. Thus, they have not increased their sales prices accordingly and this affects their profitability."

They may also decide to adopt a strategy to reduce their fixed costs, such as moving to a smaller space.

Net profit

This is the profit that the company generates. "Here, we have subtracted all the expenses, which include depreciation and taxes and interest on the debt," says Ms. Niemeyer.

Return on investment

According to the two trainers, return on investment is often something that is not looked at enough by entrepreneurs. And it is likely to vary enormously depending on the type of investment.

"If you buy a machine that deteriorates quickly, you should quickly have a return on your investment, whereas if you buy a commercial building, it will take longer," says Maxim Montminy.

“In this era of uncertainty, people tend to look for a faster return on investment, because everything can change quickly,” adds Nathalie Niemeyer.

The two trainers also advise entrepreneurs not to lose sight of everything they have invested in their business.

"If the entrepreneur has $5,000 left at the end of the year, this amount does not mean the same thing if he had to invest $100,000 in his business as if he had to invest $10,000," says Nathalie Niemeyer. "We are talking about a profitability of 5 or 50%. That makes a big difference. You have to keep an overall vision."

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