Jun 30, 2018
In this episode of the Practice of Therapy Podcast, Gordon talks about having a sustainable and profitable private practice and some of the mindset changes he has made around all this. Gordon shares how the book, Profit First by Mike Michalowicz, has changed some of his thinking around the financial side of private practice. In particular, Gordon talks about getting away from some of the traditional ways in which we think about money and how to use it. It’s a mindset shift of not letting what you gain financially from your practice being just the “leftovers”. It’s about maintaining a lifestyle that is comfortable and sustainable over the long haul.
>>Enter the Sustaining Your Practice Giveaway<<
This past month we had to buy a new car. My daughter was in an accident (No one was hurt thank God!) and so it was a “have to” kind of situation; the car was totaled. And whenever you have to make a big money decision like that, it really causes you to think about your money.
Like most of us average people, making a big purchase like that comes with an “ouch factor”. Could we afford it? What kind of car could we get with money we had budgeted? So needless to say I started thinking about how I was managing my money, not only at home but in my private practice as well.
I had heard a lot of “buzz” about the “Profit First” system, but quite frankly, had not looked into it much. So last week, I was taking some time away from the office to spend a week doing some volunteer work and decided to take the book, “Profit First” by Mike Michalowicz along.
For the most part, the concept of “profit” is just common sense. Very simply put, it’s the money you get to keep from your business after people pay you for your services. The traditional formula is simply:
INCOME – EXPENSES = PROFIT.
The traditional way of thinking about profit is what money is left over after you pay your expenses. So the idea is you keep your expenses low and increase your income to make a profit. And it does work mathematically. But what if your income goes down and/or your expenses go up. It can create A LOT of anxiety.
“Profit First” is a term coined by Mike Michalowicz that turns our traditional way of thinking about profit on its head. Instead of taking your profit from what is left over, Mike says take your profit off the top, then pay your expenses.
INCOME – PROFIT = EXPENSES
The truth of the matter is that most people tend to live paycheck to paycheck. And unfortunately, many of us in private practice tend to run the business side of the practice that way too. We’ll wait to pay ourselves after we have paid all the expenses.
What this does is have us biting our nails at the end of each month to see what we can take home. Hopefully, we will have enough to pay ourselves AND put some in savings to use as a buffer. Unfortunately, very few people get ahead doing it this way.
A better way to do this is to take what you pay yourself AND your profit on the front end, then use the what is left for your expenses. Again… sounds crazy and a bit risky.
But the truth of the matter is that when we get control of our money, rather than it controlling us, it can be very easily done.
First of all, do take time to read “Profit First” by Mike Michalowicz to get more details. Also, consult financial experts on this. But find one that is more progressive and maybe has knowledge of this “profit first system”
Essentially, the “system” is all about assigning percentages and doing small but consistent allocations to different accounts that you set up to hold your money as it comes in. The other thing that it is important to do with this system is to make slow and intentional changes over time. This is NOT a “get rich quick” way of doing things. It’s all calculated and based on your actual numbers.
The starting place for adopting the profit first system is to first get an accurate picture of your current financial situation over the past year or 6 months. It means getting a picture of your trends and history with your practice. In other words, getting accurate data on how much money is coming into the practice and how much is going out. You also need to know what you have in reserve if any.
Once you have gathered your data, break it all down into percentages based on 5 categories:
Owner’s Comp (what you pay yourself)
Mike Michalowicz has resources on his website that go into more detail about all this and how to calculate it. You can check those out here: http://www.mikemichalowicz.com/resources/
The standard way of thinking for most people is that they can increase their profit by increasing their revenue. But, what typically happens with that is that as you increase your revenue, your operating costs go up as well. So it ends up being a wash with very little, if any increase in profit.
The other thing that can happen is that people tend to think of owners comp as being synonymous with profit. It really should not be. Profit is a bonus AND a portion of that should be used to pay down debt and create a residual account for slow periods.
Owners comp should be fair pay for what you do. It’s as if you are an employee of your practice. And if you do have employees, you would never want to dup them on what they should be paid. Right!? Treat yourself the same way!
To make the shift, you want to always give yourself a profit AND pay yourself before you pay out all the other things.
To implement profit first and begin making a profit and paying yourself, you want to begin making incremental shifts in the percentages over time. In the example given, you would want to begin increasing the percentage going to profit, owner’s comp, and taxes while decreasing operating costs.
You will notice, I said nothing about increasing revenue. And that is really the game changer to some degree. It means you do not need to work harder, just smarter! But, if you did bring on more clients (increase revenue) you would want to also increase your profit while keeping operating costs at the same level.
In a nutshell, profit first is about changing from simply subtracting expenses from the total and using what is left over to create profit. Instead, you allocate percentages from the top.
Total Income – Expenses = What you use for Profit & Take Home Pay & Taxes
Total Income – Profit & Take Home Pay & Taxes = What you use for Expenses
It’s about taking control of the flow of money and controlling it throughout the year, rather than letting the money flow control you!
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 Apple Podcasts, Stitcher and Google Play. Follow us on Twitter @therapistlearn and Pinterest “Like” us on Facebook.