419 Transcript

Dr. Jeremy Sharp Transcripts Leave a Comment

[00:00:00] Hello, everyone. Welcome to The Testing Psychologist podcast, the podcast where we talk all about the business and practice of psychological and neuropsychological assessment. I’m your host, Dr. Jeremy Sharp, licensed psychologist, group practice owner, and private practice coach.

This podcast is brought to you by PAR.

Conduct a broad-based assessment of personality and psychopathology with the gold standard Personality Assessment Inventory or PAI. The new PAI Spanish revised translation retains semantic equivalents while using clearer and more inclusive language. Learn more at parinc.com\pai.

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 entering the code [00:01:00] “testing”.

All right y’all, welcome back to The Testing Psychologist podcast. I’m glad to be here.

Today we are talking about money. Yes. Money, money, money. Maybe it’s the tax season talking, but it seems like finances are coming up more and more often in my consulting sessions over the last few months. Specifically, people are very curious about how to allocate money in private practice: How much should I be making? How much should be profit? How much do I save for taxes? How much can I spend on testing materials? Today, I am tackling some of those questions.

Now, note that the vast majority of this material that I will communicate is drawn from the book Profit First for Therapists by my friend and colleague, Julie Herres. So check that out if you would like. It is linked in the show notes.

If you’re a practice owner and you would like some support, I would love to help you out. My group coaching experiences are all full until the [00:02:00] summer. The next cohorts are going to start in July, but I am opening up two individual consulting spots starting in April of 2024. If that is interesting to you, you can get more info at thetestingpsychologist.com/consulting.

Okay. Let’s dive into some money stuff.

All right, we’re talking about money, let’s do it.

To get started, like I said at the beginning, this is largely an informal review, I suppose, of the book Profit First for Therapists by Julie Herres.

If you haven’t heard of the Profit First Model, it was originally developed by Mike Michalowicz. He wrote the book Profit First. I highly recommend that you check it out. I’m not [00:03:00] going to do a deep dive into the Profit First Model here. I have done past episodes on it, and there’s a lot of material on the internet that you could check out.

It’s essentially based on the somewhat contrarian notion that Profit should not equal revenue minus expenses, which is the traditional model; you make money, you spend everything you have to spend to pay for stuff, and then whatever’s left over is your profit. But it operates on the model that expenses should equal revenue minus profit. The idea being that you pay yourself first, that’s profit, and then figure out what’s left over to spend on other things.

This sounds great, right? That’s great in theory, but harder in practice.

The original Profit First book was great in my opinion. But Julie’s book dials it in for mental health professionals. In the original book, he [00:04:00] talks about a number of different industries, but many of those industries and the examples just didn’t feel relevant for mental health private practices. And that’s where Julie’s book comes in and picks up the slack.

I find myself coming back to this book frequently when talking with my consultant clients about finances in their private practices. There’s a lot of great content in the book, but I’m going to focus on a relatively top-level aspect, which is where your money goes at different stages of practice. This is the question that’s been coming up more and more often lately in my consulting. So I want to address some of that and hopefully give a little bit of a guide or set expectations for where your money should be going at different stages of your practice.

Now, the vast majority of practice owners out there are either solo or a small group. So I want to focus there. Let’s start with the solo first.

[00:05:00] Since all of your payroll costs are only going to you, this is, I think the easiest financial model to wrap your mind around. When you talk about your top-line revenue, that’s every bit of money that you generate in your practice from client payments, usually, it’s client payments. Now, if you are making money from something else, good for you. I don’t know what that would be outside of client payments. Maybe you’re selling products, courses, and essential oils in your waiting room, who knows, but this is all the top-line money that comes into your practice. That’s your top-line revenue and that’s your gross revenue.

So your expenses will be somewhere around 20% of your revenue. When I say expenses, I mean everything you spend money on. So that’s rent, testing materials, office furniture, computers, EHR software, and so forth. Everything you spend money on. Meals, travel, [00:06:00] whatever it may be, that should equal about 20% of your revenue.

You’re going to save about 20% for taxes. Okay, that might be a little low, might be a little high. This is going to depend on your tax situation, whether you’re married, if you file jointly, income, all that kind of stuff. But let’s just say 20% for taxes.

And that leaves about 60% that will go to you in some form or fashion. So you can break that down however you’d like that typically be, you pay yourself a salary, so to speak, of about 40% or you take distributions or make transfers of around 40% of your income. And then that leaves about 20% for profit on top of what you’re already paying yourself.

So pretty simple, right? You pay yourself about 40%, [00:07:00] you should have about 20% profit, 20% goes to expenses, and 20% goes to taxes. All right, easy.

Let’s make this real. If you are generating $200,000 a year in your solo practice, your expenses should be about $40,000, right? You should save about $40,000 for taxes. You will pay yourself about an $80,000 salary, and then you have a profit of about $40,000 as well.

Now, I’m sure some of you more financially savvy of you out there are saying, wait a minute, if profit is $40,000, why am I also paying $40,000 in taxes? Well, this is where this is a generalization, right?

You only pay taxes on the profit in your practice. So if your profit is $40,000, 20% of that is going to be [00:08:00] $8,000 to $10,000 if we’re being conservative. So this depends on whether you are truly paying yourself a salary and then taking profit on top of that. If so, then your taxes would only be about $8,000.

But if you are just taking distributions, which a lot of solo practitioners are, you’re not set up with payroll, you’re not paying yourself a salary, in reality, you are just taking distributions from the bank account. And so in that case, you’re paying yourself about 60% of the gross revenue. And then we’re back to that number of about 20%, maybe 30% being saved for taxes. So just to clear that up a little bit. Either way, point being, these are ballparks and you should be pretty safe if you stick to these numbers. As you can see, if you are [00:09:00] getting paid or have access to about 60% of the gross revenue, that’s pretty good. So you’re taking home $120,000 out of $200,000.

Let’s take a break to hear from a featured partner.

Y’all know that I love TherapyNotes, but I am not the only one. They have a 4. 9 out of 5-star rating on trustpilot.com and Google, which makes them the number one rated Electronic Health Record system available for mental health folks today.

They make billing, scheduling, note-taking, and telehealth all incredibly easy. They also offer custom forms that you can send through the portal. For all the prescribers out there, TherapyNotes is proudly offering e prescribe as well. And maybe the most important thing for me is that they have live telephone support seven days a week. So you can talk to a real person in a timely manner.

If you’re trying to switch from another [00:10:00] 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 free. You can go to thetestingpsychologist.com/therapynotes and enter the code testing. Again, totally free, no strings attached. Check it out and see why everyone is switching to TherapyNotes.

Conduct a broad-based assessment of personality and psychopathology with the gold standard Personality Assessment Inventory, or PAI. 22 non-overlapping scales cover a full range of clinical constructs, so you’ll get the information you need to make a diagnosis and formulate a treatment plan. Plus, for your clients who speak Spanish, the new PAI Spanish revised translation retains semantic equivalence while updating language to be clearer and more inclusive. Learn more at [00:11:00] parinc.com\pai.

All right, let’s get back to the podcast.

Let’s talk about a small group practice. A small group to me is the owner who’s still doing a lot of clinical work, maybe another 2, 3, possibly 4 clinicians, maybe even up to 5, and then possibly an admin staff.

Expenses, not including payroll, remember we’re talking testing materials, rent, computers, EHR, meals, furniture, all that kind of stuff should still be about 20% to 25%, but now we have to add in some payroll costs. You’re going to be paying your clinical employees somewhere around 30% of gross revenue and your admin staff anywhere up to 5% of gross revenue.

So you might be saying, wow, That’s low. I thought [00:12:00] employees make about 50% to 55% of collections. This is true. But in small groups, the practice owner typically generates a lot of revenue still. So the percentage that goes to employees is lower than it would be if only employees were generating revenue.

Let’s do another quick example to illustrate.

Let’s say that you’re a small group generating $400,000 in revenue for the year, but $200,000 of that revenue is generated by you, the practice owner. This practice owner, by the way, is going to be very busy and overwhelmed because you’re still doing full-time clinical work and running your practice. These are the folks in my intermediate practice mastermind. But that means that employees are generating the other $200,000 and you’re likely paying them around $100,000 or $110,000 of that. That’s where we’re at the 50% to 55% of their generated revenue going to payroll.  [00:13:00] So the percentage of gross revenue, that $400,00 going to payroll is more like 25% or so, 25 to 30%.

All right, lots of numbers, but I wanted to explain that. So again, expenses not including payroll are about 20% to 25%. You’re paying your clinical employees somewhere around 30% of gross revenue, and your admin staff, anything up to 5%.

All right. So now we get to talk about your salary. So your salary will be about 20% at this point. You’re saving another 15% to 20% for taxes. And that leaves about 10% to 15% for profit on top of your salary. So if we are going by our example here, you will see that 20% of [00:14:00] $400,000 is about $80,000. And then another 10% to 15% of that is going to be another $40,00 to $60,000. And so you’re in the same income ballpark actually at this small group stage if you look at what you’re taking home. Again, this is generalizing. But these are good ballpark numbers for where the money might go in a small group practice

So, how do you know if you’re in these ranges? You might be listening. You might be nodding saying, okay, this sounds great. I have no idea if I’m in these ranges or not. Well, that’s okay. This is where bookkeeping software comes into play. So this is QuickBooks, which is great. Xero is also another one. Wave is another one. In any of these [00:15:00] programs, you’re going to run reports that can tell you exactly how much you’re spending at each of these categories and what percentage of revenue they are.

Don’t be embarrassed about this. I’ve worked with longtime practice owners who have no idea what their expenses look like and what these percentages look like. So, this question comes up at all levels of practice, all stages of development, and all stages of longevity and practice. So don’t be ashamed. You can get a lot of clarity by using bookkeeping software.

Okay, so what do you do then if you have the bookkeeping software but you have realized that you are off from these numbers? That’s okay. You do not have to panic. Julie’s book, Profit First for Therapists, lays out a plan to get you from your current percentages to your target percentages. And [00:16:00] she’s very clear about that and how to do that.

I do want to normalize that fluctuation in expenses and revenue is relatively common, especially at the beginning of your practice and during times of transition, like hiring, scaling back, making a big purchase, that sort of thing. I’ve personally seen these percentages go all over the place during my 15 years in practice.

So the idea, hopefully, is that these numbers stabilize and become more predictable over time, and it’s okay if:

1. You’re seeing some fluctuation or variability.

2. You’re off from these numbers.

That’s why this book even exists because people don’t have a great idea of where they should be and how to get there if they’re not where they want to be.

The other underlying layer here is, your money mindset, right? I’m fully aware that there are some serious concerns for us in terms of [00:17:00] staying on top of money, avoiding money, being afraid of money, all that kind of stuff. So if you’re afraid of numbers, if you are bad at math, if you don’t like talking about money, if you grew up in an environment that either shamed you for wanting money or you didn’t have much, there are any number of reasons why you may not want to dial into your money. That is okay. You are not alone. There is plenty of support.

One person that comes to mind right away is Brandy Maybrush. She was a speaker at last year’s Crafted Practice retreat. She’s a financial coach for mental health folks. She advises having money dates regularly to get more acquainted with your finances. So if you can’t do this on your own, can’t bring yourself to have your own money dates and look at your numbers, you can either get an accountability partner, like a friend or romantic partner or spouse, anybody you trust to sit down and look at the money with you.

Most [00:18:00] bookkeepers will also meet with you at least quarterly, if not monthly to go over your numbers as well. Sometimes we have to go beyond that. We have to do some money mindset work in therapy or elsewhere to get more comfortable with money, having it, not having it, spending it, and everything in between.

Again, a short little dive into practice finances for the solo and small group folks, trying to get an idea of where your money should be going, how to get there, and what to do if you’re not there.

As always, I hope this is helpful. If nothing else, I highly recommend you check out Profit First for Therapists. I’m not getting paid or anything to endorse this book. I read it. I got a lot from it. I’ve recommended it to a lot of folks and it is linked in the show notes. There’s a ton of great info in there to [00:19:00] get you started with your money knowledge.

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 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 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 [00:20:00] 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 website is 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 [00:21:00] 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 expertise that fits your needs.

​Click here to listen instead!

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.