Aug 7, 2018
In this episode of the Practice of Therapy Podcast, Gordon talks about creating a sustainable practice that supports the lifestyle you want to have. He talks to about how he would have done some things differently, knowing what he knows now about being in private practice. In particular, Gordon talks about what he has learned about why private practices fail and the financial side of owning a small business.
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A book that has caught my attention here lately and I have been reading is The E-Myth Revisited; Why Small Businesses Fail and What To Do About It by Michael E. Gerber. The premise of the book is that most people that go into small business are excellent technicians but lack the skill for management and being an entrepreneur.
If you think about, that is so true for most all of us in helping professions. We are trained to help people and provide services. We have excellent clinical knowledge and know how to apply it in the therapy room. That is also where our passion lies. We do this kind of work because we truly want to help people.
The primary reason practices fail is because of clinicians not knowing how to manage the financial and business sides of private practice. They also fail because they get overwhelmed with growth and not knowing how to navigate the increasing demands of a growing business.
You know the biggest question that anyone should ask themselves before jumping into private practice is “why”? You hear that from me a lot. It’s more than just a rhetorical question. It’s about understanding what you need for yourself in life to help you feel happy and content. It’s something most of us in this field ask our clients all the time…what do you need to make you happy?
Of course, there are no simple answers to that question. But if you were to peel away all the layers of this question, what would be at the core of what you need to make your truly happy?
The simple answer to this question, for most of us is simply “freedom”. Freedom to set your own schedule to have the time off we need with our families. Freedom to do therapy in the way we want to do therapy. Freedom to have the kinds of clients we best work with. And finally some financial freedom with possibly greater earning potential.
I think too, that for most of us, money is important, but it is NOT what motivates us. What motivates us is knowing that we have helped someone in a genuine way. Also what motivates us is having a lifestyle that is relatively stress-free and surrounded by those people and things that bring us comfort and contentment. Family, friends, home…
Second, but not necessarily in the order, we are motivated by feeling like we matter. We want our work to make a difference and to be valued by others. We want what we do to get noticed and truly inspire change in the world.
So, if you had a million dollars what would really change for you? For most of us, it is an idea that we associate with winning the lottery or coming into some big windfall of cash. It’s a pipe dream. We think or have the fantasy that somehow our lives would get easier and that we could live a different lifestyle.
The truth of the matter is that having an exorbitant amount of money does not equate to having more happiness or even a greater quality of life. How many times have we heard of people that win the lottery and their lives quickly go down the tubes because it is too much to handle?
For most of us, what we really want is when it comes to money is to be able to buy and do the things that contribute to a standard of living and quality of life. We want to be able to eat out, go on vacations, have a decent car, good healthcare and not have to worry about bills and debt. We also want to have enough money in reserve for any unforeseen problems that might crop up.
If we are totally honest, having a big pile of money would maybe give us a sense of security, but would we really change our lifestyle that much? Maybe get a bigger house or a new TV or maybe get yourself out of debt. But I think for most of us, we would just want to have more time leisure time with our families and be able to work when and how we wanted to.
When it comes down to it all money really is, is something that has a universal value that we exchange for something that is more valuable to us personally. And unless you are totally self-sufficient and living totally off the grid, you have to have money to live. You have to buy food, shelter and clothing… basic needs.
Then we also need to have a way to get money in order to have even just the basics, not to mention the things that add to our quality of life. So in order to get money, we exchange our time and knowledge for money. But we also have to have the supports in place in order to even do that exchange. A car to get us to our workplace, the gas to put in the car, licenses and car tags, car insurance, etc… just to name one aspect of all that.
The other thing about money is being able to prepare for that time when we are no longer able to exchange our time and expertise for money…AKA retirement. In order to do this, we need to have a stockpile of money held back from what we spend on all the other things we need to prepare for those days ahead… AKA reserves
The other part of the equation that comes into play, especially in our culture today, is borrowing. When we want to boost our lifestyle or get something we do not have the immediate cash for, we borrow it from someone else… AKA debt. Debt is simply someone taking the risk of getting repaid from the money you are getting from your cash flow or your reserves. And usually, it is with the stipulation that you give them more money in exchange for having lent you the money, to begin with… AKA interest.
The key to any successful business is in putting the right systems and processes in place to maintain cash flow. It also means balancing that by putting money into reserve for those times when the cash flow slows or you are not able to exchange your time and knowledge for money.
First of all, you have to start with fully understanding your current financial situation. This means not only knowing your practice/business financial situation, but also your personal financial situation. You need to find out exactly how much money you have in the way of personal assets (everything you own) and what is owed to others (debt). You also need to know your current cash flows and what you can expect from future cash flows. It’s what you expect to come in and what you expect to pay back out.
Secondly, you need to structure things so that the money coming in: pays you, gives you a profit (excess), pays off your debt, pays your expenses, and gives you a reserve for things like taxes and down times. One system I really am excited about with all this is Profit First by Mike Michalowicz (He will be a guest on the podcast later this month!)
What the Profit First system does is uses an allocation system based on percentages that you predetermine are needed for your business and for yourself as a practice owner. The book will walk you through an assessment process to help you determine how you should be allocating the money you are getting from your practice (and other sources).
The third thing, which is part of the second, is doing all you can to get yourself out of debt. In particular things like student loans, credit cards and car payments. Those three things will absolutely suck the life out of your practice and you personally if they are not addressed.
Getting out of debt is like “free money”. If you were to think about what you make in monthly payments and what it would be like to put that money into your reserves instead, it would most likely make a huge difference. It would not only free up your cash flows, but it would be a huge burden lifted emotionally and psychologically. You would no longer feel that stress.
Another one the books and resources I like a lot is Total Money Makeover by Dave Ramsey. A strategy for getting out of debt that Dave Ramsey suggests is the “Snowball Strategy”. With this strategy, Dave recommends focusing on paying off your smallest debt first as quickly as possible. Then when that debt is paid off, using the amount of that payment to add to what you are paying on your next highest debt and so forth. What this does is help you maximize the time it takes to pay off your debt. It’s a “snowball effect”.
The fourth thing that can be done to help with having a solid financial plan is to know your tax liabilities. So many times clinicians in private practice get themselves into trouble because they are still operating under an “employee” mindset vs. a “self-employment” mindset.
Being self-employed is much different than being employed from a tax standpoint. When you are employed, your employer is responsible for making sure your income taxes are withheld AND they pay a portion of those for you. When you are self-employed you are responsible for paying all of those taxes. Typically, an estimate of what is owed is paid quarterly.
Make sure you are covering this! So many times private practice owners will reach the end of the year and find out they owe several thousand dollars in income taxes and do not have the cash on hand to cover it.
Consult with experts! It’s always a good idea to have a trusted accountant that can advise you on tax implications and how to structure your business. They can also advise you on what you need to be paying for your taxes.
Most of us go into private practice with the idea of simply being a solo practitioner, having a comfortable income and only working when we want to. But as they grow, they realize that things get a little more complicated and the ups and downs of practice makes it well..uncomfortable.
As they grow, the time they are having to spend on administrative functions goes up as well. For some practices, if they continue to grow, they reach a tipping point at which they need to hire an administrative person and/or add clinicians to the practice in order to free up time. (You know, it’s that time you wanted before you went into private practice, to begin with!)
Growth does bring in more income, but it also creates additional expenses. This is why it is important to have that clear understanding and handle on the financial side of things. It is also why I like the Profit First system because it is based on percentages. If the percentages are where they need to be, growth truly brings more profit.
Ultimately, we all want a certain quality of life and lifestyle. Knowing how much money that will take and what you need to give yourself financial freedom will help you better know how to structure your private practice.
Most of us, if we are brutally honest, do not aspire to be multi-millionaires. We just want a life! We want to be content with what we have and be surrounded by the people we love the most. Money is just a tool. So in reality, it’s not about the money. It’s about having a meaningful life that is relatively stress-free.
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 on iTunes, Stitcher and Google Play. Follow us on Twitter @therapistlearn and Pinterest “Like” us on Facebook.