Transcript

It's essential for aspiring PT entrepreneurs to understand basic financial terms since financial literacy is critical to making informed decisions, managing cash flow, and ensuring the long-term sustainability of a business. The goal of this episode is to define the most essential financial terms and discuss their relevance. 

Let’s jump in!

Revenue
The total amount of income earned from business activities such as products and services.

Relevance – indicates whether the business is generating enough income to cover costs and eventually generate a profit.

Costs of Goods Sold
Measures the direct cost incurred in the production of products or services
Product-based business – includes manufacturing, materials, and shipping
Service-based business – includes labor, training, and supplies

Relevance - indicates the true costs of products and services. The measure informs pricing decisions, identifies areas for cost reduction, and assesses the overall health of the business.

Gross Profit
The amount of money a company retains after deducting the cost of goods sold from revenue. 

Gross profit = Revenue – cost of goods sold.

Relevance – indicates a company's financial health by showing how efficiently it sells products or services.

Operating Expenses
The costs a business incurs in its day to day operations.

Examples include expenses such as rent, salaries, utilities, marketing, and administrative fees.

Relevance – evaluates the business’ efficiency and profitability. Keeping operating expenses low relative to revenue helps to assure profitability.

Net Profit (Net Income)
Total earnings after all expenses have been subtracted from revenue.

Relevance – referred to as a business’ bottom line and is a true indicator of profitability. Analyzing net profit helps businesses make informed decisions about how to allocate resources and invest in growth opportunities.

Cash Flow
Money that moves in and out of a business over a specific period of time.

Relevance – indicates a businesses ability to meet existing financial obligations. By balancing inflows and outflows of cash it ensures smooth day to day business operations and sufficient reserves.

Gross Profit Margin
The percentage of revenue that exceeds the cost of goods sold.

Gross profit margin = Gross profit / revenue x 100

Relevance – describes a company’s financial health, performance over time, and the efficiency of producing products and services.

Let’s explore an example of how these financial terms would be utilized with an actual business.

Scenario
A new business offers a review book to assist students with their preparation for Orthopedic Specialization.

Projected Quarter 1 Sales

Revenue
100 books
Price: $125
Revenue = $12,500

Cost of Goods Sold
Book cost: 100 books x $15 per book
Cost of goods sold = $1,500

Gross Profit
Revenue – cost of goods sold
Revenue = $12,500
Cost of goods sold = $1,500
Gross profit = $11,000

Operating Expenses
Marketing $2,700
Typesetting $1,950
Graphic design $ $1,250
Shipping $1,350
P.O. Box = $75
Operating expenses = $7,325

Net Profit
Gross profit – operating expenses
Gross profit = $11,000
Operating expenses = $7,325
Net profit = $3,675

Cash Flow
Cash flow = $3,675
*for simplicity purposes, we are assuming that all cash inflows and outflows occurred in Quarter 1.
Cash flow = $3,675

Gross Profit Margin
Gross Profit Margin = (Gross Profit / Revenue) x 100
Gross profit = $11,000
Revenue = $12,500
Gross profit margin = 88%

Summary of Financial Results
Revenue = $12,500
Cost of goods sold = $1,500
Gross profit = $11,000
Operating expenses = $7,325
Net profit = $3,675
Cash flow = $3,675
Gross profit margin = 88%

Summary
Performing financial analysis is crucial when considering a new business since it helps assess the potential profitability, viability, and sustainability of the venture. In addition, the financial information will assist with tracking performance over time and strategic planning.

Why Financial Terms Matter:

• Revenue - helps determine whether you’re growing your customer base
• Cost of Goods Sold - indicates if you're pricing your product appropriately and managing production costs effectively
• Gross Profit - indicates how much money is made before considering operating expenses
• Operating Expenses - critical to ensure you don't overspend
• Net Profit - reveals if your business is truly profitable
• Cash Flow -determines if you can pay your bills and keep operations running smoothly
• Gross Profit Margin – indicates money made after covering the cost of goods, relative to the associated revenue

Tips to Get Started:

• Start Simple: Focus on tracking revenue, expenses, and cash flow. These are your day-to-day priorities.
• Use Accounting Software: Tools like QuickBooks or simple spreadsheets (e.g., Excel) can help automate and track these numbers.
• Set Goals: Establish financial goals for each metric (e.g., "Reach break-even in 6 months" or "Increase gross profit margin to 70%").
• Revisit Projections Regularly: As you gather real data, update your projections and adapt your strategies accordingly.

Action
It’s never too early to start making financial projections. Don’t worry about being overly precise or including every possible metric. Start a very basic spreadsheet that minimally includes the financial terms previously discussed. 

Free your imagination since there are no right or wrong answers to this exercise. You can become much more precise with your financial projections as your business concept evolves.

And there you have it, another dose of PT-preneurial inspiration to fuel your journey. Check out more inspiring stories from PTs and PTAs our there making waves by listening and subscribing to our podcasts on your favorite streaming platforms. And, don’t forget to rate and review this podcast. Thanks for listening!