Many of y’all know that I have been using TherapyNotes as our practice EHR for over 10 years now. I’ve looked at others and I keep coming back to TherapyNotes because they do it all. If you’re interested in an EHR for your practice, you can get two free months of TherapyNotes by going to thetestingpsychologist.com/therapynotes and enter the code “testing”.
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Hey folks, welcome back to The Testing Psychologist podcast. [00:01:00] Let’s talk about some money. It’s another business episode focusing on finances.
The longer I do this, the more convinced I am that having a good handle on finances drives everything in your practice. Unless you’re running a practice as a hobby with no regard for profit or financial sustainability, you have to know your numbers. The trouble is that many people don’t know how to start getting a handle on finances. And today we will talk about the financial model that I use in our practice and how it can be helpful in your practice.
Now, if you are a practice owner and you would like some support in running, growing, starting, or scaling that practice, I’d love to help you out. We’re in the middle of Group Mastermind cohorts. Cohorts typically start in July and January. So at this point, if you are interested in consulting, we could talk about doing some individual work one-on-one, dive deep, and figure [00:02:00] out what might be most helpful for you. You can go to thetestingpsychologist.com/consulting and check it out.
All right, let’s talk about this financial model.
All right everyone, let’s dig into it.
Before I totally dive into it though, I want to encourage all of you to go check out the YouTube video that accompanies this episode. There will be a link in the show notes to the YouTube video. In that video, I walk through the model that I use. I do a screen share and plug in some numbers, tweak the model a little bit, and just show you how it works. I think it’s really hard to describe a spreadsheet and talk about numbers in general on an audio podcast. So that video is a great accompaniment.
[00:03:00] Let’s talk about it. I’ve made a lot of financial mistakes in my practice over the years. You’ve probably heard about these mistakes if you’ve listened to the podcast for any amount of time. It goes from ignoring the aging for the first 3 to 4 years and racking up about $90, 000 in unpaid bills to paying people too much to overspending on office snacks. Y’all know those organic pretzels cost a lot. There are many pitfalls for mental health businesses. Testing materials are going up. The list is endless.Around 2018, I started to hit a breaking point and began having conversations with friends about whether running a private practice was worth it, by which I meant, I’m not making enough money to justify this whole thing.
I just want to pause and emphasize that there is no shame in struggling with finances. I consider myself to be a relatively financially savvy person in terms of investments, [00:04:00] money management, and so forth, but creating and sticking to an actual financial model in practice was very hard. And like any other skill outside of clinical work, we were not taught this stuff in grad school. Don’t get down on yourself if it does not come intuitively. There is learning involved and that takes time.
Since then, I have sought help from several financial professionals to get on track. It’s an iterative process. I’ve gone through a number of models to dial in the finances for the practice and I think I’ve finally arrived at one that fits my needs. And so this model that I’m going to talk through and that I’m going to show you in the video was a collaboration between myself and Jennie Schottmiller at Simple Profit. She is a financial professional and an accountant, and she helped tweak this model to make it picture-perfect. I want to make sure and give her a shout-out. She runs an amazing Facebook group for [00:05:00] finances and financial help for mental health practice owners. She’s also a social worker, so she gets it from both sides. She’s been on the podcast before. I’ll provide all those links in the show notes, but shout out to Jennie for helping tweak and perfect this model.
What exactly is a financial model? That sounds fancy, right?
It’s a fancy phrase for a budget. I’ll be at a somewhat complex budget. The bottom line is that a financial model should tell you how much you’re making and can expect to make, how much you’re spending, and how much “extra” you’ll have. This is relatively simple for a solo practice, but it becomes really important when you start hiring folks, expanding office space, and/or considering significant purchases or changes in your practice.
The model that we’re going to talk through, I think is probably most helpful for those of you who have employees or contractors of [00:06:00] some sort, whether it’s admin or clinical, and those of you who are considering expansion. It could still be helpful for solo practices. It might just be a little bit of overkill.
What are the components of my model?
I try to keep it pretty simple. I think I’ve mentioned here before, maybe not, but in the software company that I started, Reverb, we have an extensive financial model. I’m talking, you open the spreadsheet and it is 20 different sheets with calculations, thousands of rows, and a lot of predictive power. It’s a super complex model. That is not what I’m talking about here. For a practice like ours, I try to keep it pretty simple.
Within the main spreadsheet, there are three main separate sheets. One is called payroll expenses, one is called predicted revenue or the cost of each employee, [00:07:00] and one is called the full budget. Let’s walk through these.
The payroll sheet; this sheet details the hours of compensation and benefits for all of your employees. You can tweak it to make it fit for contractors. That’s a pretty easy fix. At the end, by which I mean the right-most row, it gives me a salary number. So this is what the employee is going to make per year. And that’s what goes on their offer letter. But it also gives me a true employee cost number, which is how much an employee costs the practice, including compensation, payroll taxes, and all the benefits that you’re going to throw in.
I’ve talked here before about how a lot of practice owners get tripped up because they will calculate someone’s salary. That’s great. Like, let’s say that person is making $100, 000 a year, fantastic, but they forget to include the extra [00:08:00] expenses that go along with that, like payroll taxes – that’s going to add about 8%, benefits, that’s going to add anywhere from 2 to 7% or maybe more. And so you end up costing more for each employee than just their salary. So this spreadsheet gives me the true employee cost number, not just their salary. So that’s the first sheet. Pretty straightforward, right?
The next sheet I’m going to jump to is the full-budget sheet. This is also pretty straightforward. It’s a summary sheet that has your total income and expenses. Now, the work that you would do on the spreadsheet is that you’re going to fill in the major expenses. For our practice, these are rent, testing materials, software, office supplies, marketing, and legal and professional services. If you remember from conversations with your accountant, [00:09:00] these are the big categories you’re going to have to group all your expenses into. There are certainly more. I’m not saying this is all of them, but these are the major expenses. The way I have the sheet set up, you can sub in and out the different expenses, you can change them, you can add rows, and so forth, but these are the major expenses that you’re going to input and it will give you the monthly and annual cost of each of these expense areas. Then, I go ahead and add a 5% buffer or multiplier to the expense category, just to make sure that I’m overestimating expenses. I’d rather be conservative and overestimate and then be pleasantly surprised than underestimate and be unpleasantly surprised.
Let’s take a break to hear from a featured partner.
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If you’re trying to switch from another EHR, the transition is incredibly easy. They’ll import your demographic data free of charge. So you can get going right away. So, if you’re curious, or you want to switch, or you need a new EHR, try TherapyNotes for two months, absolutely free. You can go to thetestingpsychologist.com/therapynotes and enter the code “testing”. Again, totally free, with no strings attached, check it out and see [00:11:00] why everyone is switching to TherapyNotes.
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All right, let’s get back to the podcast.
The other component of the full budget sheet is it will ultimately calculate how much you’re going to owe in taxes, how much profit you’re going to have- those are related, and how much you are going to take home annually and monthly as the owner of the practice.
All right. The third sheet is called [00:12:00] the predicted revenue sheet. This is where I think the magic happens. This sheet will also calculate the cost of each employee relative to your expenses and it’ll let you know how much each employee is covering your overhead, so to speak. So once you calculate your expenses and estimate how many hours your employees will be billing and their average compensation, you’ll be able to figure out what percentage of revenue is dedicated to expenses for each employee.
Let’s bring this to life a little bit. If you have three employees billing $200, 000 a year, that is $600, 000 in total revenue, right? Let’s just say that your expenses total $150, 000. So expenses are going to equal 25% of your total revenue. That is 150, 000/600, 000 = 25%.
[00:13:00] Now you can calculate whether each employee is covering their share of expenses, which lets you figure out which employees are most profitable and which ones are less profitable.Taking our example, we know that each employee is generating $200, 000 a year in revenue. We know that expenses will be 25% of that. So about $50, 000 per employee. So each employee now has essentially $150, 000 “leftover” to cover their salary benefits and hopefully have some profit leftover.
If the true employee cost for employee number one, that is salary plus benefits is $132, 000, then you’re going to have $18, 000 leftover for profit, which is about 9%. Again, lots of numbers here. I know that. Definitely go check out the video. It’ll bring it to life a little bit more. If you’re [00:14:00] paying employee number two a little less, and their true employee cost is $120, 000, then you’re making $30, 000 in profit, which is 15% on that employee.
And if you’re paying employee number three a lot, maybe they’re a leadership team member or very experienced, or you want to keep them and you decide to pay them more to try to do that, let’s say you’re paying them $151, 000, or they cost you $151, 000, then you’re actually going negative for them because remember they are not covering expenses, right? Their true employee cost is eating into the amount that we need to cover expenses, but that’s okay because the other two employees make up for it. And this third employee is a valuable member of the team who takes a lot off your plate, let’s say.
You can see the value in this kind of model. [00:15:00] It’s very helpful for folks who want to know if they can afford to give people raises or how much to pay people at hiring time, whether to start with a salary or whether they can afford to rent a larger office and any number of other things. That’s the cool thing about it. I think it’s pretty easy to change up some of these numbers and get an instant feedback mechanism for the impact of changes in cost or salary or compensation and whatnot.
Now, as usual, like I said, when talking about finances and spreadsheets on a podcast, this is very difficult. It can be complicated. So again, I’ll just encourage you make sure and go to the link in the show notes to check out the YouTube video to watch this video, where I will be screen sharing the model and talking through each component of the spreadsheet.
And if you are not a financially minded person, that is 100% okay. I’m happy to chat with [00:16:00] you. There are also plenty of other professionals who can chat with you, but this could be an awesome topic for what I call a strategy session. This is just a one off consulting call where we meet for an hour. I’ll be happy to help put in the inputs for each sheet here and get you a working financial model. I think we could easily do it within 30 to 60 minutes. So keep that in mind. And again, you can go to thetestingpsychologist.com/consulting to set that up. I look forward to maybe working with some of you on finances. And if not, I think this is totally doable on your own, check it out and enjoy manipulating some of those numbers.
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 [00:17:00] 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 or Spotify or wherever you listen to your podcasts.
If you’re a 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.
[00:18:00] The information contained in this podcast and on the Testing Psychologist 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 [00:19:00] supervisor with an expertise that fits your needs.