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Hey everyone. Welcome back to the practice finances mini-series episode 2. We’re talking about a little bit more nuanced numbers. In the first episode of this very mini-series, I talked about the one number that you need to be concerned about in your practice- that is profit. [00:01:00] Today, I’m going to get into a little bit more nuanced discussion of finances and the numbers that you want to be paying attention to.
Now, if you’re a practice owner at any stage of development and you would like to connect with other practice owners in a group coaching setting, you might check out The Testing Psychologist mastermind groups. There’s a group for beginner, intermediate, and advanced practitioners ranging from just launching your practice all the way up to managing larger practices. If that sounds interesting, you can schedule a pre-group phone call at thetestingpsychologist.com/consulting.
Okay, everybody, let’s get into it.
Last week, you hopefully heard the message that [00:02:00] profit is the most important number to track in your practice, but there’s more to it. A 15% to 20% profit margin doesn’t just come out of nowhere. Here’s why. Expenses matter. Expenses are the other side of profit.
How do you track your expenses? Well, you can use bookkeeping software like QuickBooks, like I mentioned. It’s super easy. Otherwise, you’re just guessing.
I know that there are probably many of you out there who do not even have a separate business bank account or a separate business credit card to put your business expenses on. You’re running your business expenses through your personal accounts. So I’m here to tell you to stop that.
Now is a good time. It’s as good a time as any to go out and open an account. You can do it online probably. Just open a business account and apply for a business credit card [00:03:00] to keep your expenses separate. It’s going to be so much easier when it comes to tax time and it’s going to give you so much better information and make it easier to access that information when you are diving deep in your finances, which I know you’re going to start doing after these episodes.
Getting back to it. Use bookkeeping software to track your expenses. If you don’t want to categorize all of your expenses and transactions in QuickBooks or your accounting software, then don’t do it yourself. Hire a bookkeeper. They’re relatively inexpensive and they’ll produce a nice, easy report at the end of each month to tell you what you’re spending and what you’re making.
Let’s talk about expenses real quick. I’m going to do a quick breakdown of typical expenses for solo and medium-sized practices to give you a sense of what things should or could look like.
For a solo [00:04:00] practice, overhead should be very low maybe, 20% to 30% should go to overhead. This is even less than I mentioned last time. I think I said overhead would be somewhere between 40% to 70%. I was being conservative, but the overhead should be pretty low.
To make this come to life a little bit, if you make $10,000 a month, your expenses should be around $2000 to $3000. And it might break down like this. You might be paying let’s just say $500 to $1000 for rent. Again, the solo practice. So single office utilities included. $600 to $1000 for rent. Of course, this will vary depending on geographic area. So those of you at the ends of the curve, I apologize, but [00:05:00] somewhere in that ballpark, $500, $600 to $1000 for a full-time office rental.
EHR and software might run you about $100. $300 to $500 for testing materials each month. This is likely a little high. $200 to $400 for incidentals like meals, furniture, decoration, consultation, and things like that. $200 to $400 for admin support, which would get you about 3 to 5 hours a week in most markets which I think is all you need in the beginning as a solo practitioner, and then that leaves maybe $100 to $300 for marketing. All told, that adds up to about like I said, $2000 to $3000, maybe even $1500, if you stick to the low end of all of those ranges. [00:06:00] Profit should be pretty high.
Now keep in mind that you take your taxes out of profit. So you are taxed on whatever profit you make. So again, on that $10, 000, that means you are profiting $8000, and you will be taxed at whatever your tax bracket is on that money. So let’s call it 25%. So $2000 of that $8000 is going to go to taxes, which means you take home about $6000 and you can do with that whatever you would like. Maybe you save it. Maybe that’s what you pay yourself. So profit is relatively high in a solo practice.
Now, as practices grow to more like the medium-large size, expenses do go up and the percentage of expenses do go up. So your profit should be around 15% to 20% with the percentage decreasing the bigger you get.
So let’s take this example. Let’s say you’re making [00:07:00] $50, 000 a month. All of your expenses might add up to about $40, 000. So that leaves $10, 000. That’s 20% of $50, 000. But of those expenses, here’s where that might go. Payroll is going to be a big expense. That should be about 55% of your income. So that would be about $25,000 to $30,000. Let me back up. For the first payroll I mentioned, the large portion should be the employee clinician payroll. So $25,000 to $30,000; 55% of that $50, 000. Admin pay should be about 4%, so that might be $2000 to $2500.
Your overhead for your practice, that’d be testing materials, furniture, software, and things like that should be around 10% to 12%.[00:08:00] So maybe $5,000 to $7,000. Your rent should be maybe 5% or 6% so $2,500 to $3, 500. Leadership pay if you have that would be another 2% to 3%. So that might get you another $1000 to $2000. Once you add all of that up, we are somewhere in the neighborhood of $40,000 give or take.
Now, where do we get into trouble as practice owners? There are a few areas that we get into trouble. We spend a lot on testing materials. So you have to know the cost of goods sold, so to speak.
For example, in our practice, we know that it costs about $50 to $60 per evaluation just to do the evaluation. That includes all materials, scoring software licenses, et [00:09:00] cetera. That can quickly add up depending on how many tests you’re administering. So keep that in mind and just know that you have to take that off the top when you are considering your profit in a testing practice.
The other place that I hear people getting in trouble with group practices is paying employees too much. I hear a lot of 60% to 65% splits in W2 practices. And unless you are a cash-pay practice with a good steady flow of referrals and a relatively high fee, this is simply not feasible. Unless you want to run just razor-thin margins, paying your employees 60% to 65% is going to get you in trouble very quickly.
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All right. Let’s get back to the podcast.
I did an episode a while back on calculating salary and broke down the true cost of a salary when you started a 60% split and you ended up adding a good 10% to 15% extra in taxes and benefits. And that adds up very [00:11:00] fast. It can get you in trouble and does not leave much room for other expenses.
Another area that I see us getting into trouble is not considering no-show fees, not as big of a deal in solo practice, but could be a really big deal in bigger practices. Actually, I take that back. It could be a big deal in solo practices. One no-show could eat up anywhere from 5% to 25% of your income for a month if you’re in solo practice. So if you’re doing 4 evals a month and one of them no shows, that’s a lot.
The average no-show or late cancel rate in bigger practices is 5% to 10% and that comes straight out of profit if you’re paying no-show fees. So if you pay your clinicians for no-shows and you’re not collecting on that, then that comes straight out of your profit. So that earlier example of a $10,000 profit on a $50,000 monthly income is now down [00:12:00] to maybe $5, 000 or $7, 500. When that’s your personal take home, money to pay taxes and save for emergencies and stuff, that’s quite a big hit. So monitoring no-show fees is pretty important. Charging a no-show fee is very important.
Another place that I see people get into trouble is having too much overhead. So stretching for rent. Your rent should only be 6% to 10% of your income at most. So consider that. Buying expensive furniture or technology, buying too many tests that you don’t use, and or over-testing which is also a clinical issue, all of these things contribute to a much larger overhead than you need.
So, what to do? Well, I mentioned it many times, but I would say get a good bookkeeper. Bookkeepers help a lot. [00:13:00] Without a bookkeeper, you’re doing it yourself, which is entirely fine, but a bookkeeper is not just about running the numbers in QuickBooks and pressing buttons. A bookkeeper is also about keeping you accountable because a good bookkeeper will meet with you monthly and go over the numbers with you so that you cannot put your head in the sand.
Another way to help yourself is to learn your numbers. You don’t need crazy financial literacy, but you do need a moderate understanding of each of the slices of the pie, so to speak, slices of the income pie, where they should be going, what they should look like, and how big they should be. So to have more profit, you either need to decrease expenses or increase revenue without increasing expenses.
Many of us can increase revenue just fine. We can bring in more clients, but if you also are paying employees to see those clients, you’re not necessarily increasing your [00:14:00] profit. So to have more profit, you either have to decrease expenses or increase revenue without increasing expenses.
And how can you do this? Well, you can do more private pay. You can pay for your software annually instead of monthly. Many software items will give a discount for annual subscriptions rather than monthly subscriptions, but it’s so much easier to pay monthly because it seems like a lower amount. If you can afford it, just pay for it annually, and save some money.
You can shop for deals on furniture and technology. This would include looking on the Facebook marketplace, things like that, holding out for sales, Labor Day, Memorial Day, that sort of thing. Spending about $1000 to $1200 per office is a good ballpark.
You can [00:15:00] get fantastic furniture for $1000 to $1200. You don’t need fancy computers for your employees or yourself, right? I’m guilty of this. I have a MacBook Air. I do not need a MacBook Air. Well, I take that back. I do all my podcast recording and production here. So I think it’s helpful for that.
The average practitioner does not need a powerful computer. Get a basic computer that just lets you check email, run your EHR and run Microsoft office to write your reports. You don’t need a super nice computer.
Let’s see. Other ways to increase your revenue. Make sure to institute a solid no-show and cancellation policy and actually charge those fees. This can be huge.
A final option is to apply for grants. They are out there. You just have to search for them. Our practice recently got [00:16:00] a grant that’s been helpful. It’s free money. You have to keep records typically on how you spend the money, but it is free money.
So those are just a few ideas about how to increase profit and potentially decrease expenses.
An upcoming episode is going to focus on credit card strategy. This is an adjacent topic. It’s not necessarily decreasing expenses, but there are some credit cards out there that I will talk about that give you a number of perks that are almost like decreasing expenses either by rewarding you with miles and points or literally giving you statement credits for certain expenses in your business. So stay tuned if that sounds interesting to you. I think that’s coming in the next episode or two.
All right. More advanced stuff for those of you who [00:17:00] may want to dig deeper into your finances. You can look at your income over time or by season, by month, that kind of thing. So really break it down and look for trends in your income from year to year and month to month. You can break down your practice income by insurance panel or payer source. You can break down income by employee. Many EHRs will do that and tell you what each employee has charged and what they’ve collected.
You can dig into your marketing return on investment. Is what you’re doing returning money? This is another problem that I see people spend money on things that don’t return anything. I’m looking at you, people who buy pens and stress balls and water bottles and that sort of stuff. Do you know that that stuff is bringing money into your practice? If so, please tell me how you know that. I don’t know how to track a pen or a water bottle to know [00:18:00] if it’s bringing people into my practice.
Actually, write a budget for your practice. Very few of us do this and most legitimate businesses have budgets. So again, work with a bookkeeper or an accountant to write a budget for your practice. It doesn’t have to be perfect, but have something, have some sense of what you want to spend each month, and how that compares to your income.
And then finally, if you want to get deep into it, you can look for what’s called a fractional CFO, Chief Financial Officer, or someone similar to help forecast and budget for your practice. So this would be an individual who truly specializes in business finances and can help you dig deep and develop a financial plan for your practice. Again, that’s a fractional CFO. You should be able to Google fractional CFO and get plenty of options.
[00:19:00] Long story short, money should not be scary, should not be shameful, should not be confusing. Although it is all of those things and will continue to be all of those things for many of us, including myself. This is an ongoing journey for me. I’m guessing it’s an ongoing journey for many of you as well, but I hope that some of this was helpful and maybe went a little way toward decreasing some of the difficult feelings around money.All right, y’all. Thank you so much for tuning into this episode. Always grateful to have you here. I hope that you take away some information that you can implement in your practice and in your life. Any resources that we mentioned during the episode will be listed in the show notes. So make sure to check those out.
If you like what you hear on the podcast, I would be so grateful if you left a review on iTunes, Spotify, or wherever you listen to your podcast.
And if you’re a [00:20:00] practice owner or aspiring practice owner, I’d invite you to check out The Testing Psychologist mastermind groups. I have mastermind groups at every stage of practice development: Beginner, Intermediate, and Advanced. We have homework. We have accountability. We have support. We have resources. These groups are amazing. We do a lot of work and a lot of connecting. If that sounds interesting to you, you can check out the details at thetestingpsychologist.com/consulting. You can sign up for a pre-group phone call and we will chat and figure out if a group could be a good fit for you. Thanks so much.
The information contained in this podcast and on The Testing Psychologist [00:21:00] website are intended for informational and educational purposes only. Nothing in this podcast or on the website is intended to be a substitute for professional, psychological, psychiatric, or medical advice, diagnosis, or treatment.
Please note that no doctor-patient relationship is formed here, and similarly, no supervisory or consultative relationship is formed between the host or guests of this podcast and listeners of this podcast. If you need the qualified advice of any mental health practitioner or medical provider, please seek one in your area. Similarly, if you need supervision on clinical matters, please find a supervisor with an expertise that fits your needs.