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Dr. Sharp: [00:00:00] Hey, what’s up, y’all? This is Dr. Jeremy Sharp, and this is The Testing Psychologist podcast, the podcast where we talk all about the business and practice of psychological and neuropsychological assessment.

I’m glad you’re with me today. Also glad to have my guest with me today. My guest today is Adam Lean. Adam is here to talk with us all about finances. If you’re like myself and many other practice owners that I know, just the term finances and numbers can be pretty scary. That’s why I wanted to have Adam on for this third episode in our Winter Business Series.

Adam is going to talk to us all about the reasons that small businesses fail, the particular numbers to pay attention to, and how to track those most important numbers and get your head around the finances in your practice so that you can operate it more confidently and with less overwhelm.

So just a little bit about Adam. Adam has been an accountant by trade for quite a long time; going back nearly 15 years he’s been in the accounting industry. He has been a small business owner himself. And if you read his story, you’ll see that two years into owning his small business, he experienced that crushing sense of being overwhelmed that a lot of us experience, and through that process, doubled down and had to find a way to get a handle on his business.

So through that process, he developed some really cool strategies and ways to learn about finances and track finances. After all of that came online and he got his business turned around, he started The CFO Project. So Adam is now the president of The CFO Project. And for several years now has been helping small business owners get [00:02:00] their numbers straight and learn how to control finances in their practice.

So that’s what we’re talking about today. I think you’re going to enjoy it. It’s a super business-heavy episode, and I know this is something that a lot of practice owners can benefit from. So stick around and listen to my conversation with Adam.

Before I jump into the conversation, I want to again, give a shout-out to the upcoming mastermind groups that will be starting in late March, or early April of 2020. These are group coaching experiences. I am the facilitator in both groups. There is a Beginner Practice group and an Advanced Practice group.

So wherever you might be in your stage of practice, if you’re interested in group coaching where you get to hang out with other psychologists who are right at your stage of practice, get vicarious learning and direct support from the other group members, check it out. I would love for you to reach out and see if the groups might be a good fit for you. You can do that at thetestingpsychologist.com/consulting, scroll a little way down, and you will find information about both of those groups.

All right. Onto my conversation with Adam Lean.

Hey everyone. Welcome back to another episode of The Testing Psychologist podcast. Like you heard in the intro, I am here with Adam Lean, the founder of The CFO project. We’re going to be talking all about numbers, accounting, reasons that your business may not be doing so well, and how to fix it if it’s not doing so well.

Adam, welcome to the podcast. 

Adam: Hey, I’m really excited to be here. Thank you for having me. 

Dr. Sharp: Thank you so much for coming on the show. [00:04:00] It’s been cool. Adam and I connected in the Iron Sharpens Iron Mastermind Group which is amazing. I’ll link to that in the show notes.

I think what you’re doing can be really important for businesses like ours. We tend to be accounting averse and despite our love for numbers in the work that we do, it’s hard to look at the numbers on the business side. So thank you again. I’m glad you’re here.

Adam: Thank you.

Dr. Sharp: I would like to dive right into it, honestly. You talk a lot about why businesses fail and I think that’s worth talking about. Why do businesses fail?

Adam: That’s a really good question. According to this small business administration, 50% of all businesses never see their 5th birthday. 

Dr. Sharp: I feel like I’ve heard that. So that’s true?

Adam: Yeah, that’s according to the SBA (the small business administration) and that’s a staggering number. They fail. Now, there are many reasons why businesses fail, but when it boils down to it, if a business has healthy cash, if the business is creating cash and they don’t owe that cash to anybody else, they get to keep it, they’re not going to fail in most cases because they have the cash. So it all boils down to the fact that businesses that fail, regardless of the reasons why, it ultimately boils down to they’re not creating cash.

There’re two ways to generate cash. Everybody hears the term cash flow, but nobody really understands what that really means. All that is, is cash flowing into your bank account minus all the cash flowing out. So what’s left over is cash that you get to essentially keep at the end of the day. And your goal is to improve that that you get to keep. 

Dr. Sharp: Right. [00:06:00] That seems to make intuitive sense. Just make more than you spend. That’s what we’re talking about. 

Adam: Yes. It sounds simple, but for anybody listening that runs a business, it’s harder than just spending less than you make. You need to spend less than you bring in. Obviously, that helps. And that goes into how do you create cash? If you need to create cash, the big question is how do you do that?

Dr. Sharp: Mm-hmm.

Adam: Well, the first way you just essentially mentioned it, make more than you spend. That’s basically making a profit. And there’s a whole slew of ways to make a profit. We could go into that later on if you want. There’s some strategies, some tactics to improve your profit. But that’s one of three ways to create cash. And it’s my favorite way.

The second way is to take on debt. So you can go get a bank loan and they’ll give you cash that you could deposit into your bank account. And that’s cash. Another word for cash is working capital. When people say working capital, that’s basically money to keep the lights on, but you don’t own that cash. It’s not yours. You have to pay it back. You didn’t create it really, but it’s there for working capital reasons.

The third way to get cash is to get investors. For 99.9% of small businesses, that’s just not an option. Uber, last quarter, made $3.1 billion in revenue and they had a loss of $1.1 billion. That’s crazy. How can they do that? Well, they have investors that are pouring cash into the business. [00:08:00] That’s not a reality for most small businesses. 

Dr. Sharp: Yeah. That kind of world. I hear those numbers and it just does not even make sense to me. 

Adam: No, it doesn’t make sense to me either. 

Dr. Sharp: That’s good to hear. But that’s really what you focus on, right? Your whole thing is serving as an external chief financial officer for small businesses who are, I mean, we’re not rolling around with tons of investor money or anything like that. We’re just trying to, like you said, keep the lights on, especially in the beginning. So, for small businesses like us, I don’t know that we have a good handle on a lot of these concepts, right? 

Adam: Yeah. I was going to say, that’s the norm. Most small business owners don’t. And it’s because most business owners get into their business. They start a business or buy a business because they’re an expert at a specific craft.

I’m assuming most people listening to this are therapists, psychologists, and counselors because that’s what they love to do. That’s what you’re trained in. That’s what you love to do. That’s what you do on a daily basis. But that does not mean that you’re an expert in numbers.

But at the end of the day, you own a business. And there are two things that measure really the success of the business, profit, and cash flow. Both of those are numbers. And so somebody has to help you figure those out. And that’s what a CFO does for big businesses. Amazon.com has a CFO to help the leadership understand really just two things: what are the [00:10:00] numbers, what do the numbers mean, and what to do about it? That’s it.

Well, big businesses have that, but every business needs something like that. And this is essentially why I started my business is because most businesses have a bookkeeper and an accountant. Their job is to record what happened in the past. That’s it. They’re not getting paid to help you strategize or grow or figure out ways to improve, especially accountants. They’re there for compliance reasons. They want to make sure that the IRS has what they need. That’s it.

You need an accountant and you need a bookkeeper, but that’s not enough. You have to understand what the numbers are telling you and what to do about it. And that’s where we come in. We are like a CFO, but we have a specific process to help you understand what the numbers are telling you, what’s going right, what’s going wrong, and then what to do about it. How to interpret your numbers.

We do that by actually creating a scoreboard for every client. Every month, we just give them this very graphic, visual scoreboard. I could talk through what’s on the scoreboard so anybody can create their own, but a very easy-to-understand scoreboard that shows them what’s going right and what’s going wrong at preventing them from making a profit.

Dr. Sharp: I love that. I want to highlight that you’re right on, first of all, that we are good at our craft, but not so good at running the business, in most cases. I can’t think of a single therapist or psychologist I know who also has a degree in accounting or business or marketing or anything like that. I do have one friend much to his credit who is a dentist with a minor in business, and he’s doing fantastic, but I don’t know anybody else like that. So that’s totally there.

The other [00:12:00] piece too is that, I think the majority of us probably have an accountant and maybe a bookkeeper, but the idea of actually projecting forward and having someone try to help us strategize in the future versus just keeping track of what we’ve already spent or made is totally novel. I don’t know of anyone who’s actively doing that with an external. I think a lot of us try to do it on our own. 

Adam: The 50% of those businesses that fail, I guarantee you most of them had a bookkeeper and accountant.

Dr. Sharp: Oh my gosh.

Adam: That’s the thing. You need somebody on your team that can help you strategize, and most business owners don’t have somebody they can talk to. They can’t talk to their employees about this kind of stuff. They don’t want to bring more stress home to their spouse. They need somebody that they could talk to about what’s going on; what’s going on with my numbers and what can I do about it?

Everybody’s pretty much been to a sporting event. Nobody walks around to the fans in the stands or to the players or the coaches and hands out long sheets of paper with numbers, line item by line item on them every time. Nobody does that. They have a scoreboard because the fans and the coaches and the players need to understand quickly what’s happening and make it simple.

Well, most business owners get every month from their accountant or bookkeeper, these complicated reports line by line with numbers, and it’s called financial statements. It’s P and L or income statement or balance sheet or statement of cash flow. Nobody knows what that means, much less what to do about it. Most people look at their income statement, go to the bottom line and see, well, I made [00:14:00] a profit, or I made a loss and they’ll put it away and move on to the next thing.

You have to understand what those reports are telling you so that next month that report will be better. Your revenue and your profit and your cash flow will be better next month. People need that type of help. And if you don’t get that type of help, you just got to learn it yourself, which is great. Anybody interested in business, I can recommend several books and other things to start to understand your financials, but the bottom line is, you’ve got to know your numbers just like if you watch shark tank, they always say, you got to know your numbers. 

Dr. Sharp: Yes. There’s so much to dig into there. I would love to circle back. Hopefully one of us will remember this before the end of the podcast because I know there are folks out there who like the do-it-yourself approach and would appreciate any resources to be able to tackle this on their own if they want to.

Adam: Yeah, absolutely.

Dr. Sharp: So let’s circle back to that. I can put any books or resources in the show notes. In the meantime though, I want to back way up and just say or ask rather what this balance sheet is or profit and loss. I’m guessing that there are some people out there who get these from their accountants and don’t even really know what they are or aren’t getting them from their accountant or bookkeeper and maybe should at least start there. Is that fair?

Adam:  Yes.

Dr. Sharp: Let’s go way back. What are we even talking about here as a basis of knowing the financial health of your practice? 

Adam: Yeah, there are two reports. We just talked about the balance sheet and income statement. I’ll explain what they are very simply in just a second.[00:16:00] But I like to take whatever main numbers that are important to your business, and I’ll go over those main numbers for most businesses, and then put them on a very simple report. I call it a scoreboard, but anybody can just create their own. Just have one place where you have these nine numbers and just track them every single month.

You want to track it three ways, each number, and I’ll go over those nine numbers here in a second, but for each number, you want to track three ways. You want to track the last year’s numbers by month, you want to track this year’s numbers by month, and then you want to compare that to a target. I call it target. You could call it a goal or even a budget, but you want to track each of those numbers in three different ways.

Where do you get these numbers? Well, there’s two reports, the balance sheet and the income statement. The income statement, we’ll start there because it’s the easiest to understand. The income statement is also called the profit and loss or P and L. Accountants love to make things confusing for no reason. But if you have QuickBooks online, for instance, it’s called profit and loss. If you have other reports, it’s called income statement.

All it is, it tells you three things, simply how much you made, how much you spent and then what your profit is.

So what you made minus once you spent equals your profit. That’s it. And it’s broken down into accounts. So there’s an account for rent, an account for insurance, account for marketing.

And then your balance sheet is a snapshot in time. So it tells you on the day that you run that balance [00:18:00] sheet, it tells you three things: how much your business owns, how much your business owes and how much your business is worth on paper.

Owns is called assets. So how much assets? A great example, everybody has a bank account with money in it. That’s an asset. So if you have $1000 in your bank account, that means you have assets. You own $1000. If you have accounts receivable, an account that keeps track of how much people owe you, that’s also an asset. That’s in your asset section. It’s how much you own. 

What you owe, these are things that you owe other people. So if you take out a credit card loan or bank loan or whatnot, you owe that and that goes on your balance sheet. And then if you simply take your assets minus your liabilities, that gives you your equity, which is how much your business is worth on paper.

So, if you have $10,000 in the bank, and you owe $5,000 on a credit card, then your business is worth on paper $5,000. I keep saying on paper because what your business is worth on paper is usually not what it’s worth in the real world when it comes down to sell your business. There’s many reasons for that we won’t go into now. 

Dr. Sharp: Okay, if we have time. I want to bookmark that because that’s the flip side of this more basic discussion that we’re having is, what if we get down the road and we’ve had a successful practice and want to sell it, how do we even value that? Maybe that’s a whole other discussion, but I’ll bookmark it for now. 

Adam: Now, very simply, most people buy businesses because they want to buy a cash flow business. They’re buying a business that is [00:20:00] going to give the new owner cash flow. And cash flow, like we talked about earlier, is how much money you’ve created. If you take all your assets and pay off all your liabilities, essentially on an annual basis, how much cash does your business create? That positive cash flow is what the new owner is buying.

So if you want to sell your business for a high dollar amount, you simply got to do one thing and that’s increase the cash flow. And again, remember that there’s three ways to create cash flow: go into debt, get investors, or make a profit. The only way to do that without owing it to somebody else is to make a profit. 

Dr. Sharp: All right. I want to really get into all of this. Let’s just lay the groundwork. We presumably have some numbers from QuickBooks that we can look at. Hopefully, you have an accountant who’s sending you income statement, profit, and loss balance sheet, and you have some sense of what’s going on with your practice. So can you help us understand what are we actually supposed to pay attention to within that statement? What are the numbers that are most important for the financial health of our practice? 

Adam: That is a great question. On the income statement or P and L, there’s the few numbers. The first is obviously sales/revenue but do you want to pay attention to revenue by specific category? So if your practice has multiple categories or departments or divisions, what would be a natural division of an average psychology practice? 

Dr. Sharp: Yeah, I was just trying to think about that.

Adam: Like maybe kids or adults 

Dr. Sharp: Oh, gosh, I guess there are a [00:22:00] number of ways you could break it down. The one that’s most relevant for us is probably testing and evaluation versus therapy services.

Adam: Yeah, that’s perfect.

Dr. Sharp: Okay. So maybe we just run with that. 

Adam: Okay. So you want to track your revenue by those two categories. I’ll explain why in a second, but you want to track your revenue that by those two categories. 

Now, you’ll get the revenue number from the income statement, but you want to take it a bit further? So the first number to track is sales or revenue by category. The second and third numbers to track relate to sales. The second number you want to track is the number of transactions by category. So a transaction in the professional practice world would be a patient coming in every month. So how many testing patients did you have that month?

And then the third number you want to track is the average revenue generated per patient by category. So if you had 10 testing patients and they each were $100, you multiply by each the average value, the average revenue generator for each patient is $100, then you know that you’ve generated $1000 in revenue. 

Dr. Sharp: Can I ask a…

Adam: Yeah, go ahead.

Dr. Sharp: Well, I was just going to ask a nuanced question that you may or may not know. So, when we’re billing insurance, we get reimbursed by the hour, basically. With a testing case, for example, we might bill let’s just say 10 hours per testing case. So, are we tracking the individual patient or the number of units per patient that we’re [00:24:00] billing? Does that make sense? 

Adam: It does. I always go back to whatever is simpler. And also, how are you getting paid? So in your case, you’re getting paid by the patient, almost regardless of the number of hours, like you’re not submitting to the insurance company number of hours, you’re submitting the patient and saying we spent eight hours with this patient this month. Is that correct? 

Dr. Sharp: Yeah. We submit claims for each patient but they do break down the number of hours that we spent with that patient. 

Adam: Yeah. And by the way, there’s really no wrong answer just as long as you’re tracking the same thing each month. I tend to track by the customer. I track by the customer for two reasons, because it’s important. This is one of the numbers that we’ll get to shortly, but you want to track your retention rate in your business.

You you’ve spent time and energy and money getting a patient to come see you for the first time. You’ve probably lost money if they only see you just once. You want to get that same patient to come see you again and again again, and that’s retaining the customer. And so you want to track your retention rate. It’s easier to track your retention rate if you’re tracking people, patients, your customers, not necessarily hours. There’s no wrong or right answer to this.

Dr. Sharp: Okay. Sometimes I get really detailed with this stuff. It really just stems from a desire to do it right. 

Adam: Yeah, I understood. 

Dr. Sharp: I think that’s relevant specifically for therapy practices where they are trying to get people to return for [00:26:00] appointments. For us in the testing world, it’s a one shot deal. Once we get people in the door, we do the evaluation with them and then they are done. They might return 2 or 3 years down the road for another one shot deal, but generally, I just want to make that clear, I suppose, as we’re moving ahead with the conversation.

Adam: Yeah, that makes sense. I would still probably track it by person just because I think that would be easier. 

Dr. Sharp: I do too. I totally interrupted. We can  go back to what numbers are we looking at? 

Adam: The first number is sales. Sales is broken down into two numbers; the number of transactions per month, and the average transaction value. You want to track it by the category or the department or division in your business so that you can compare apples to apples, because the average value of a testing patient is going to be different than in a normal therapy session. So there’s no point in looking at it together. You need to separate those out and see, can you increase your average transaction value over last year? And it’s easier to set targets or set goals for it if you track it by category.

So, if you did 10 testing patients last month, you want to track to see if you can do at least 10 or more this month. Also you, if the average testing patient was $100, can you improve that to get $101 or more this month? And you want to do the same thing for the ongoing therapy sessions. 

Dr. Sharp: Yes, that makes sense to me. 

Adam: And all of that rolls up to sales. Your P and L by looking at it, it doesn’t tell you that much information. That’s why I like to have this scoreboard. But you get the [00:28:00] the top line sales from your P and L or your profit and loss or income statement. But then you want to track on whatever scoreboard you use. It can even be just an Excel spreadsheet or a whiteboard in your office. Track every month number transactions by category and have a transaction value by category and see what you could do to improve each of those numbers individually.

Dr. Sharp: Yes. And I’ll just throw in there for folks listening that a lot of this information comes from our electronic health record or whatever accounting system you use in your practice. You can get that from there. 

Adam: Absolutely. The fourth number to track is gross profit by category as well. So, the categories that we talked about, you want to determine what the direct cost were to service that patient. So for testing, if you billed the insurance $100 for a testing patient, how much did it cost you to service that one client? And generally, in this world, most of your cost will be labor cost. 

So, if you have a practice that has multiple therapist working at it, how much are you paying your therapist to service that one client? That is what’s called a direct cost. And if you take your revenue for that one transaction minus is your direct cost, that equals your gross profit. It’s just basically how much you’ve made on that one sale.

Dr. Sharp: Okay. So let me break this down just to make it extra real for people and make sure that I’m following. So let’s say, a typical testing case is 10 hours at $100 an hour. That’s $1000. We pay [00:30:00] a technician $20 an hour to administer these tests. So that gives us a direct cost, I think you said of $200. So then the gross profit is $800 on that evaluation. 

Adam: Absolutely right. 

Dr. Sharp: Okay. Making sure. 

Adam:: Yes, you got it.

Dr. Sharp: Cool. 

Adam: So, your revenue in that scenario was $1000 your and we broke it down by one patient at a $1000. And if you wanted to do hours and get really fancy, you could say 10 hours, that’s the transaction times, at $100, by the way. So, $1000 in revenue, your direct cost was $200, so you’ve made a gross profit of $800.

Now, I like to turn that number into a percentage. That way we could compare apples to apples. We could compare how much you made percentage of sales last year versus this year versus your target. And that’s called your gross profit margin. So if we made $1000 in sales, we spent $200, we’re left with $800. You divide the $800 by your sales of $1000, that gets you 80%. So you’ve made an 80% profit margin on that one patient.

So now, in addition to the other three numbers we’re track tracking, this is the fourth number, the gross profit margin. You can now have four numbers that you can try to improve every single month. So if you improved the number of transactions and the average transaction value and your gross profit margin, then you’re improving your sales and your profit by leaps and balance. Even if you just improve one of those numbers, you’re improving everything.

As you could see, all this information is much better than just looking at an [00:32:00] income statement. You have no idea what to improve just looking at that one dimensional report. 

Dr. Sharp: Yeah. Okay. So far so good.

Adam: So that’s your gross profit. The next three numbers are all your expenses. These are overhead expenses. I like to divide them into three categories, which is why I said the next three numbers. I like to divide them into three categories or three buckets of expenses.

The first bucket would be marketing. So how much are you spending on marketing to get a new patient? And again, you want to measure that as a percentage of sales. So if you’re spending 10% to get a new testing patient, that means you spent $100 in our scenario early, you made $1000 and you spent 10%. So if that’s your goal, if you don’t want to spend more than 10% to get a new patient, you could start tracking your marketing as a percentage of sales.

And here’s why I say this. It doesn’t matter if you’re spending a million dollars a day on marketing, as long as it’s within your goal, your target of 10%, then it’s okay to spend a million dollars. I don’t understand why people, if they have ad agencies or marketing agencies, they give them a fixed specific budget; you can’t spend more than $1000. Why? You want to give, instead, your marketing people a percentage. Say, I’m willing to spend as much as long as it doesn’t go above my marketing goal of X percent.

Dr. Sharp: I like that you’re saying this this [00:34:00] because it dovetails well with a prior podcast. We were talking about cost of acquisition specifically in the context of Google ads and how to determine a marketing budget. You have to know basically how much is one client worth and maybe that’s a dollar amount, but it’s more likely a percentage of your gross profit, like you’re saying.

Adam: Well, in our example, the testing $1000 and you spent $200, the gross profit is $800. That’s really how much that patient’s worth. Not $1000. They’re only worth $800.

Dr. Sharp: Good point.

Adam: And that’s assuming that you collect 100% of that $1000, which is another number that we’ll go into later. 

Dr. Sharp: Oh gosh. Yeah, that’s a big one.. 

Adam: Yes. So the first is marketing; the first are the three expense buckets. The second is payroll. Of course you want to track your payroll. This is payroll that’s not revenue producing payroll. So in other words, that $200 that she spent is on a person delivering that service. They wouldn’t be included in this payroll. This is overhead payroll that you have to pay regardless of sales like administrative office people, things like that.

And then the third category of expenses is just general and administrative overhead; things that you have to pay regardless if you make a sale or not. So rent, insurance things like that. So then we have your sales minus your direct cost gives you your gross profit. Take your gross profit minus all those three buckets of expenses, that gets you your net profit.

You want to measure your net profit as a dollar amount and a percentage. [00:36:00] That way you can compare apples to apples. You can compare that to prior month and you can compare it to your target for next year. And if you do that every single month, it’ll become clear which of those numbers that we just talked about are hurting your efforts at improving the profit. 

Dr. Sharp: I like this. I’m with you so far. I have lost track of which number we’re on. I know you said there are nine. I think we’re on 7, 8, or did we hit 9?

Adam: We have sales; number of transactions, which is number two; and then we have the average transaction value, which is number three; your cost of sales is number four, the direct cost or cost of sales. It may also be called cost of good sold in QuickBooks. That’s number 4; number 5 is your gross profit; no 6, 7, 8 are the three expenses: The marketing payroll, overhead, and then number nine is your net profit.

So those nine numbers that if you track by month on a regular basis, and you want to compare them, and you want to put them in context to last year, this year actuals so far, and then this year actuals compared to your target. Just compare each those nine numbers to three things. 

Dr. Sharp: Okay. And just to ask a clarifying question. Is direct cost always only cost of labor that produces income? For us, that would be clinicians whether it’s clinicians we employ or our own salary that comes?

Adam: Yes. This is one of those things is there’s really no right answer. The best answer is to pick [00:38:00] away and just be consistent with it. You could put all of your employees in payroll and have almost no cost to sales if you wanted, but I prefer to keep it in cost to sales so that you can track, because if you think about it, your employee is a machine that’s making money. I know that sounds….

Think about it this way. If you own a manufacturing plant that produced a widget, and you own a machine that produces a widget, you want to track the cost of that machine to run to produce the widget, right?

Dr. Sharp: Yes.

Adam: Okay. You want to track your employee, not that they’re a machine, not that they are something you could own, but you’re still paying them to produce something that’s going to make money. What’s the point in getting $1000 from a client for testing when you’re paying your employee $1,100 to service that person? There’s no point. And you don’t know unless you’re tracking that person to the to the sale. That’s why I like to put them in cost of sales or direct cost. Does that make sense?

Dr. Sharp:  It does. I’m just laughing to myself of all the psychologists out there and what they might be thinking of employees as machines and all. That’s great.

So another question again, just making it very specific for us. So in the testing process, there are basically just a few expenses that come up. There’s the employee expense of payroll or maybe this direct cost. And then we [00:40:00] have the cost of the testing materials. So booklets and license fee, software licenses, and so forth. Where would you put the cost of the materials. Is that in that direct cost or is that in the other expenses down toward the bottom?

Adam: That would be in the direct cost, but here’s the thing though. And this is why you need to have a bookkeeper that’s worth their salt. Or what’s that saying?

Dr. Sharp: Yeah, that’s it.

Adam:  Okay. Because if you didn’t make any sales, you would not have any direct cost. So a direct cost is only if you make a sale. So if you buy $10,000 worth of materials this month, that will hopefully be used over the next 12 months, but if you get a really good deal from your supplier and you buy $10,000 worth now, that would not go into cost to sales until you use it.

Dr. Sharp: Interesting.

Adam: So until you use that. So let’s say the testing client was giving you $1000 to do the testing, and you use a kit that’s $50, then that’s when you add that $50 to the direct cost. Does that make sense?

Dr. Sharp: Yes. And even just that level of detail makes me realize how important a bookkeeper is, just to even track something like that. Like, oh, I spent $10,000 in January and now we have to distribute that throughout the year somehow as businesses coming in and we use that material. That goes way beyond what most of us are doing in QuickBooks. 

Adam: There are many fancy things that a bookkeeper [00:42:00] can do, but if you don’t have a bookkeeper and you’re doing it yourself, even if you’re not tracking in QuickBooks or whatever software you use, if you’re not tracking to this detail, at least get an Excel spreadsheet and just put on your Excel spreadsheet, here’s how much income I received from each patient last month, you need to do it daily or weekly. And then the second column put how much it cost you in terms of supplies and labor. And then just your third column would be your gross profit. So sales minus your direct. The fourth column would be turning it into a profit margin, taking your gross profit, divided by sales. And then that way you have your percentages.

And then just do that on a daily, weekly or monthly basis. And it’ll become really clear which patients you’re making money on and which patients you’re not making money on. Because in the world of service-based businesses, which this is, in this world is service-based businesses, it’s really easy to fool yourself into thinking that you are making a lot of money because you’re so busy all the time. But if you’re not making a gross profit on individual patients, then there’s no point. There’s no point making one million dollars in revenue if you’re spending $999,000 to get it.

Dr. Sharp: Right. And I was just thinking, you told me, but it seems like maybe a twist on this application would be maybe not tracking it by patient, but by insurance panel, for example, because they reimburse different rates. I don’t know if that would make any sense. If you count the number of patients on each insurance panel because that’s always the siding factor unless you’re a private pay practice and you just charge the same rate for every [00:44:00] client, every time. That’s a lot more predictable, but for insurance-based practices, it varies greatly depending on what the insurance panel will reimburse. 

Adam: Do you know what that is before you even take on a patient?

Dr. Sharp: Yes.

Adam: Okay. So then you could essentially be able to price accordingly. Now you know what your costs are going into it. You know how much they’re going to reimburse you which would set your fee structure. You know how much your employee costs. You know how much your supplies are. 

Dr. Sharp: Yeah. Just a little detour maybe to think out loud. So you’ve got these numbers, the way you talk about it, you said that you use a scoreboard or a dashboard of sorts to pull all this together. This is just me because I love the techy stuff, but is this something that is in Excel or is this proprietary software that you found somewhere or built or how are you tracking this? What does it look like? 

Adam: I’ve tried to build all these fancy things and use software, but I ended up creating, and this was several years ago, I created my own spreadsheet essentially. My spreadsheet is very complicated with all these formulas and yours doesn’t have to be. Anybody listening, you create your own scoreboard. There’s not numbers, just track them.

But for my clients, we create a scoreboard and update it specifically for them and their business every single month. And then we take it a step further and in every one of those nine sections, we have other sections for cash flow and things like that, but in each one of these sections, we color code red, green or yellow. That way, the client knows specifically every [00:46:00] month what’s going right and what’s going wrong. If something’s going in the green, then that means that section is going okay. If it’s in the yellow or red, that means it’s not okay.

And then we take it a step further. Remember, a CFO or somebody like a CFO does two things: They tell you what the numbers mean, and they tell you what to do about it. So far, we’ve just talked about what the numbers mean but the most important part is really to know what to do about it. And so we advocate for everybody creating what we call an action plan, and we do this for our clients each month.

The action plan has essentially three things on it. The first is an objective. So what are the objectives that you want to accomplish based on your numbers? So let’s say that you want to increase your average patient value, then that’s the objective. Put it in plain English. I want to increase my average value of a testing patient. That’s it. Put it in plain very clear language. 

Dr. Sharp: So taking that a step further and making it even plainer, that would be basically like raising our fees. 

Adam: Yeah. Actually, let’s pause there for a second. Let me get back to that in a second. At this point, all you need to do is come up with an objective. I want to do this. 

Then the next step, and this is what we do, you can do a variation of this, but this is what we do, the next step is to define what that means; what we call a key result. This is where we’re getting specific. So if you want to increase your average [00:48:00] testing transactions, then the key result is saying from what to what? So if we want to go from $1000 to $1,100, that’s the key result. We know that we’ve hit that. So from $1000 to $1,100, that’s the key result.

The third thing is to come up with next steps to accomplish the objective. So if you want to increase the testing value, and we know we want to increase it to in order to make sure we’re on the right track as our profit target, then you come up with the next steps to accomplish that.

So that’s where your idea is, what are the next steps? What are the things that you could do? Well, you could increase prices. You could see if you can reduce material costs. You could see if your therapists are spending too much time. Like if you know you’re only getting a finite amount from the insurance company and the therapist is spending more time than you can afford on that patient, then you need to cut back your therapist time, which is why I advocate for doing the tracking payroll by job or by the patient.

Dr. Sharp: I see.

Adam: But there’s a slew of things you could do, but I suggest only coming up with four at the most next steps for every objective. And I only think you should do at the most three objectives per month, because if you try to do everything, nothing is going to happen. So you need to determine what are the main objectives.

For our clients, we’ll come up with the objectives for you. So you don’t even have to think about it. We’ll show you. Here’s the 2 to 3 main things that will improve your profit or cash flow. And by the way, these objectives and key [00:50:00] results and next steps, it’s a variation of a process that dates way back to Henry Ford. He started the Ford motor company.

Dr. Sharp: Oh, that’s from Henry Ford company?

Adam: Yeah. He wanted to figure out a way to get his crew to produce more vehicles basically, per shift. And so he started tracking each shift, that is obviously getting people who are on a manufacturing line. Well, in the 70s and 80s, that concept was taken from a manufacturing plant to how can we apply that from manufacturing employees to thinking employees, basically people that work in an office, how can we do that?

So they came up with a variation and it’s now called objectives and key results. And each business, Google uses this, Amazon uses this or several big businesses that use this philosophy, but come up with objectives like 2 to 3 objectives for the entire business, and then have your employees, if you want to get really fancy, have your employees come up with their own objectives that will help you accomplish your big objectives. And then every month through each objective, come up with the key results. What will change if you do this objective? 

Dr. Sharp: That’s got me. Gosh. My mind is just spinning with ideas from all of our talk. And I wonder, just to make it really concrete for folks, I know you work with healthcare practices. What would be some common objectives in a healthcare practice, even if it’s not necessarily psychologists specifically, 

Adam: Honestly, it doesn’t even depend on the type of industry. I have a doctor that’s a [00:52:00] colonoscopy. He owns a colonoscopy screening practice. He has about 15 doctors that work for him, and 99% of his billing is insurance based, but he could have a objective one month that has nothing to do with the fact that he’s a doctor who runs a practice.

I also have another company that owns a roofing company. The colonoscopy doctor and the roofing company could have the exact same objective. It really doesn’t depend on the industry. It depends on the specific financials of the business in relation to what your goals are. And that’s why for every one of those 9 profit numbers, you need to have a target or a goal for each one of those. And then you know clearly what your objectives are.

Just a real-life example, in this doctor practice, the colonoscopy screening practice, one of the objectives that we came up with was the fact that nobody wants to get a colonoscopy done, but through their marketing team and all that, they would spend a ton of time and resources getting patients to schedule a colonoscopy screen, but then only 70% of those patients would show up. The industry norm, I think in their industry was about 85% would show up. So 15% no-show, but they were having a 30% no-show.

If we increased their objective from 70, and this is the key result, 70% to 85%, that represented, for their business $900,000 in profit. If they could just do that one thing, that one objective, and accomplished that key result [00:54:00] going from 70% show rate to 85% show rate, that would represent in their particular business, $900,000 in net profit. That one objective. And that was the only objective we gave them that month.

Dr. Sharp: I would say so. Right.

Adam: And it doesn’t have to be complicated. Business owners and I’m included in this, I love to overcomplicate things and put a ton of things on my plate just because I like staying busy, but you only have a certain number of hours in the week to work on your business. If you’re going to spend a certain number of hours to work on the business, not in it, but on it, you might as well be working on the most important things that will improve the profit of your business. And the best way I’ve found to do that is to come up with objectives by looking at your profit scoreboard.

Dr. Sharp: Such a good point. I’m glad that we’re breaking this down even though this is a lot of info. I would guess a lot of folks out there are like, oh my gosh, I don’t know what to do with these numbers and how do I find them? And this and that. I mean, it’s easy to get lost in all that detail, but the central theme is just knowing what’s going on behind the scenes.

Adam: Yeah. Know your numbers.

Dr. Sharp: Right.

Adam: Know your numbers and know what to do about it. Two things. 

Dr. Sharp: Yeah. I could see that what to do is the hard question.

Adam: It is.

Dr. Sharp: I could see insurance reimbursement or collections actually being a big part of this for a lot of practices. I hear a lot of trouble collecting from insurance companies. So would that be an example of an objective?

Adam: Yeah. I want to increase the collections from an insurance company. That’s the objective. It’s very clear. Then your key result is all right, from what to what? [00:56:00] I want to go from 85% collection rate to 88% collection rate. That’s a really small step. Then figure out what are the four next steps needed to do that. And then do the next steps and then measure, did you accomplish the key result? If so, you’ve met your objective. 

Dr. Sharp: Onto the next one.

Adam: That’s right. Onto the second-most supported objective. And all of that is going to help improve your profit and by improving your profit, now you have more cash flow that the business gets to keep and pay off debt or reinvest in the business, do more marketing, hire more employees, go on vacation, save for retirement, whatever. You can’t do anything unless you create cash. You can’t create cash that you own unless the business makes a profit to do that. You don’t want to be in a position where all the cash you have is because of debt or personal funds that you’ve invested in the business. 

Dr. Sharp: Right. Geez, this is good. So, of all the, let’s just say service-based businesses you’ve worked with, where are some of the places where we really get into trouble? Anywhere in this spectrum of numbers to track, where do we really get into trouble particularly?

Adam: Two places. Honestly, the first is not making enough gross profit per transaction. Not really understanding how much you’re making on the average transaction. That’s super important to understand. If I own a therapy practice, I would rather have [00:58:00] quality over quantity. In other words, I’d rather see 10 patients a day and make an 80% margin than see $1000 patients a day and make a 0.01% margin.

Amazon, for instance, is operating in the volume game. They’re processing a million transactions probably daily, who knows, especially this time of year, but they’re not making that much. The grand scheme is a retail business. Same with Walmart. They’re processing a lot of transactions. A lot of customers come in and shop, but they’re not making that much money on each person. They’re making less than 1% per person.

In a service-based business, you’re restricted because the product you’re selling is really an employee. You’re a person. You’re not buying charm and toilet paper for pennies and reselling it like Walmart does. You’re hiring employees and reselling their time. And so, you’ve got to make… I’d rather make a lot of margin and have high-quality employees which would translate into a better experience for your customers. 

So the bottom line is, that the first thing is to track how much you’re making on each client. The second thing is making sure you’re monitoring your cash flow- turning your profit into cash.

Dr. Sharp: What do you mean?

Adam: There are a lot of profitable businesses that go out of business because they can’t turn that profit into cash. Here’s what I mean by this. If you make a $1000 sale on a client and after everything is said and done, you made a $200 profit, then if you’ve never collected that $200 from the insurance company, you’re [01:00:00] profitable, but you have no money and you can’t pay your bills. But you’ve also, in the meantime, you’ve had to pay your employee, you’ve had to pay for those supplies, you’ve had to pay the rent, insurance.

So you’re spending money now. So, not only are you not making money, you’re going in the hole if you haven’t collected on that. So that’s the second thing. You’ve got to collect. You’ve got to turn that profit into cash flow. 

Dr. Sharp: I appreciate you spelling that out. I think you hit the nail on the head for many of us, even private pay practices. I think that the biggest challenge is collecting. We’re doing plenty of work. I think people probably do a good job of making sure their expenses are relatively low, but actually collecting the money that we should be making is a huge challenge. And then insurance, of course, it can be really challenging to collect insurance.

Adam: Right. Understood. 

Dr. Sharp: How common, just to zoom back out, this kind of service seems awesome and really needed. I can only imagine how businesses really benefit from this sort of thing. But at the same time, you are literally the first person I’ve ever heard of to do something like this.

Adam: Yes. 

Dr. Sharp: So, does this exist? Why have we not heard of this before?

Adam:  No, that’s a great question. So yes and no. There’s an existing industry for fractional CFOs. You can Google it. [01:02:00] Part-time CFO, fractional CFO. There are tons of people out there. Tons of big businesses are doing this. And it’s literally called fractional CFO, Part-time CFO, something like that. But they only exist, and the people that can afford them are businesses doing at least $5 million in sales. And there are people that are fractional CFOs that are amazing CFOs, that they charge $5,000, $6,000 a month.

Most small businesses can’t afford that because the business owner is not even making that in many cases. And so all those people are not there for the small businesses. And so small businesses don’t have that type of resource. I created the CFO Project because I wanted to provide that type of resource to small businesses. So when you get a fractional CFO and they’re charging $5,000 a month, they’re going to be very custom to your business and they’re going to do custom work, but they’re not full-time. They have their other clients.

So we’ve created essentially a four-step process where we give you the same type of help that a CFO would provide. Those two things I talked about earlier, knowing your numbers and knowing what to do about it. We’ll do that in this four-step process for a nominal flat fee per month. And we only work with clients that we know we can at least cover our fee. We’re very confident that we can cover our fee in additional profit by working with us. So really it’s not even an expense. It’s an investment. So to answer your question, there are fractional CFOs that do this. We’ve just taken it a step further and made it available for small businesses.

The second part of that is that the resource that most small businesses currently have are bookkeepers. Great bookkeepers will do [01:04:00] similar things to what we’re doing, but there are not that many great bookkeepers out there, at all. And so, in many cases, we will offer to do bookkeeping for our clients because we can’t do our jobs properly, the CFO work, without having good data. So we’ll do the bookkeeping for clients as well. That way everything’s under one house.

So to answer your question, there are resources, but we’ve taken it a step further and created something that is available for small businesses. And our sweet spot is businesses doing between $500,000 and about $2,500,000 annual revenue. Of course, we work with businesses doing less than that. I have a business doing $8 million in sales, but that’s our sweet spot. 

Dr. Sharp: Nice. That feels so much more amenable to mental health practices. We’re not physicians. You mentioned that $5 million level a while back, for a practice in the mental health world, that would have to mean you’d have to have at least 50 clinicians working for you. Probably more l100 if you take insurance. I mean, that’s a really, really big practice that not many of us are running. So, something between $500,000, like having that as an entry point is a lot more doable, I think.

Adam: Yeah, absolutely.

Dr. Sharp: So what’s the process look like? If folks want to get enrolled with y’all, how do you onboard people? What can they expect if they wanted to reach out?

Adam: Now, that’s a good question. We don’t take on everybody. Coupled with that, we’re not hard salespeople at all. So the best next step if anybody is interested, is to schedule just a call with me. I call it a right fit call. It’s just a 20-minute call. [01:06:00] Literally, we’ll just talk about your business, what’s going on, and what goals you would like to accomplish in the next two years. And then, we’ll get a good sense on this call together if we should take the next step, and then the next step is we’ll take it a step further, but you can’t become a client on that call. There’s no pressure. We only work with great businesses and people that we know we can help. 

So the best way to take that next step is just to schedule a call. Anybody could do that. Literally, my calendar is on my website. Just go to thecfoproject.com at the top right, there’s a bright green button that says book a call, and you could just choose whatever day and time works for you. My calendar is on that. Just book a call. We’ll get on a call, meet each other, learn more about your business and go from there.

Dr. Sharp: I love it. Nice. So we said we were going to circle back around, I’m kind of surprised at myself that I remembered, but for anybody who, let’s just say is not at that $500,000 mark for annual revenue, or maybe they’re just getting started and want to make sure they have good habits in place. What are some resources people could check out for? I guess like this basic financial advice and even more detailed advice if they want to go down that route.

Adam: The best thing to do is spend your time on is to know your numbers. There’s a book that I recommend.  There’s several books, but the main one I recommend is called Financial Intelligence for Entrepreneurs by Karen Berman, B-E-R-M-A-N. I believe that’s how you spell it. Sitting on my shelf over here. I refer to this book all the time, honestly. It breaks down [01:08:00] the numbers and it makes it clear. You can use it as a reference manual. It’s like $20 on Amazon or something like that. It’s a no-brainer. That’s my favorite book by far. And I’ve read a ton of business books. 

Dr. Sharp: Nice. I will definitely put that in the show notes as well as y’all’s website and any other cool things that we’ve talked about over our time together. Man, the time went fast. 

I really appreciate it. This was helpful. Again, I always err on trying to get in the weeds a little bit and really dig into these concepts. It can seem overwhelming, I think, in an hour-long podcast, but hopefully, people are walking away with at least some idea of like, Hey, I need to be tracking these numbers. Here are some of the big ones to track. Here’s how I can do it. And if I need help, that’s what y’all are for.

Adam: Yeah, absolutely.

Dr. Sharp: Nice. Well, thanks, Adam. It was great to hang with you in this context. We’ll talk again soon, right? 

Adam: No, this has been great. Thank you so much for having me. 

Dr. Sharp: All right, there you have it, folks. All about finances and business and numbers with Adam Lean. I hope that you walked away from this podcast as always with items to take action on. And if nothing else, you can check out Adam’s website, the CFO project to get a lot of information and just start to make sense of some of your numbers. As we talked about, and as you probably figured out through the interview, Adam’s a really down-to-earth guy, easy to talk to, and I think it could be helpful for any number of practice owners to dig into the numbers a little more specifically. So don’t hesitate to reach out to him if you have questions about any of the material here.

All right y’all. Before I let you go, just another shout-out for the Beginner Practice and Advanced Practice mastermind [01:10:00] groups that will be starting in less than two months now. I do know that the Beginner Practice group is almost full. We have 2 spots left out of 6. The Advanced Practice group has 3 spots left. And again, I have not blasted this out to my email list at all yet, at least as of the recording time of this podcast. So, if that sounds interesting to you and you’d like to be a part of the groups, give me a shout, at jeremy@thetestingpsychologist.com.

All right, thanks y’all. Take care.

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