Apr 12, 2021
Have you done your taxes yet? My guest, Danielle Hayden, created The Profit Planner to help business owners know how to analyze their business correctly, generate more profits easily, and gain greater confidence in business and by getting really intimate with their financials. Lucky for us, this episode is all about knowing your numbers. Danielle explains exactly which numbers you need to know and where you can get started. Plus, we chat about accounting software, the importance of building a financial reserve, and what you need to know about self-employment taxes.
Danielle Hayden is a reformed corporate CFO (chief financial officer) who is on a mission to help rule-breaking female entrepreneurs understand their numbers so they can gain the confidence needed to create sustainable profits.
After spending 10+ years in the boardroom as a corporate finance officer, Danielle is now in her sweet spot as the co-owner of Kickstart Accounting, Inc. where she helps business owners with bookkeeping, financial analysis, and education and as the author of the Profit Planner book series.
What numbers do you even need to know? Danielle says she could spend one hour on this question. When someone says, "know your numbers," they want you to understand your financial statements at a high level. Many people are big fans of profit first; so, you can have a combination of knowing your numbers and the profit first allocation. You should also understand your profit and loss statement and how you can prepare for tax season. When you have these things down, that means you are making smart business decisions all year long. When you're making smart business decisions, then you are maximizing your tax deductions. Overall, we need to pay ourselves as business owners and invest enough money in the business, but not too much money.
The very first place you want to start is by having accounting software set up. So you'll always have your client management software, and then you'll have accounting software. It doesn't matter where you are in your journey – it's never too early or too late to get the accounting software you need to thrive. Give yourself grace! Tax management is a critical long-term business decision. Next, you'll need to do "catch up." You'll want to put all your expenses into this software. Once all the data is in, you have a starting point. Think about how much money you brought in, where you spent the money, and any surprises in the process.
QuickBooks is an excellent place for private practice owners to work on their accounting. Danielle loves QuickBooks so much that she includes it in her costs. Xero is another popular system, and it's easy to use. Plus, Wave Accounting is free software. It is award-winning financial software designed for entrepreneurs. However, there are some limitations. Danielle says that you should plan for where you want to be. Eventually, you will outgrow a system like Wave because you will want more reporting as you get bigger. Sadly, Wave doesn't have all the reports that you need. Whereas QuickBooks will grow with your practice. Start where you're at and then build on more sophisticated software. Stay away from invoicing software that has turned into accounting software like GoDaddy.
With Danielle, there are three options: weekly, monthly, and quarterly. If you can be in tune with your financials every week, that is the gold standard. That might mean a weekly dashboard of where your cash balance is at. It would help if you also double-check your collection issues on a weekly basis. If weekly feels like a big ask, you will want to look over your finances every month. Check your sales for the previous month and compare them to past months. Once we have the basic financial information, you can also know how much money is set aside for taxes. Looking at your finances monthly, you can make quick and better financial decisions. If you are paying for software that doesn't make you money, you can quickly decide to get rid of it.
When you know your numbers and your financials in front of you, you can start to look at how much you need to reserve. Some people say to save three to six months of your expenses. However, do you even know what that number is? Your numbers are trying to tell you a story, it's your job to read the story. Know your expenses and slowly transfer money over to a savings account. Your savings account will be your rainy day operating fund. Start moving that money over there so that you can build three to six months' worth of savings. Also, it's critical to know your slow times; most people will have a slow time of the year.
The mental health crisis is causing a tremendous amount of growth for therapists. Danielle says to watch your growth. It is imperative to monitor your development and to decide how you're paying yourself. If you are structured as an LLC and take owner's draws today, that means you're just a cash expense of your business. So, you will pay self-employment tax on that profit or loss. If that number is getting close to $50,000, it's time to really start to think about an S Corp. You grew fast last year, and you're growing fast this year – it's time to reconsider how your finances are set up. Make sure you're structured right for the next year so that you can maximize how much money you're taking home in your pocket.
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Gordon is the person behind The Practice of Therapy Podcast & Blog. He is also President and Founder of Kingsport Counseling Associates, PLLC. He is a therapist, consultant, business mentor, trainer, and writer. PLEASE Subscribe to The Practice of Therapy Podcast wherever you listen to it. Follow us on Twitter @therapistlearn, and Pinterest, “Like” us on Facebook.