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”.
This episode is brought to you by PAR.
PAR offers the SPECTRA – Indices of Psychopathology, a hierarchical dimensional look at adult psychopathology. The SPECTRA is available for paper and pencil assessment or administration and scoring via PARiConnect. Learn more at parinc.com/spectra.
[00:01:00] Hey, folks, welcome back to the podcast. I’m glad to be here as always with you.Today’s guest is a professional, a colleague, a friend, and someone I’ve spent in-person time with, which makes it all the more special. I’ve got Julie Herres from Green Oak Accounting here to talk about Profit First and Beyond, is the way I think of it. I think many of you have probably heard of Profit First as a financial management or accounting system for your practice.
We talk about profit first, but then we also go beyond the basics and talk about what happens if you’ve mastered Profit First or just mastered the finances in your practice, you have good money problems, and you need to figure out what to do about that.
We do a beginning section where we talk about the basics of Profit First, financial management, and things like that. And then, we flip the script and talk about more advanced strategies, things to think about when things are [00:02:00] going well. We talked about expanding into a group practice. We talk about mistakes that people make when hiring. We talk about the expected profit margin for different stages of practice. We talk about what to pay people and compensation.
There are a lot of great points and pieces of information to take away from this podcast, as usual, but Julie brought it today. I think you’ll enjoy this one.
If you’re a practice owner, you know the drill here. If you’d like support in your practice, feel free to reach out. At this point, my mastermind groups are closed, but I am offering strategy sessions, which are one-off hours to drill deep into a particular question or two and give you some support to get you on your way. You can go to thetestingpsychologist.com/consulting and book one of those strategy sessions if you would like.
In the meantime, check out this info with Julie Herres [00:03:00] from Green Oak Accounting.
Julie, hey, welcome to the podcast.
Julie: Hey, good to see you.
Dr. Sharp: Good to see you as well. I feel like I’ve been thinking about having you on the podcast for a long time. I have seen, heard, hung out with you, read your book, and all these things. People talk about Profit First all the time. This has been a long time coming. Thanks for being here.
Julie: I’m really glad we could make this work.
Dr. Sharp: Likewise. I’ll start with the question that I always start with, which is, of all the things that you could be doing with your life, why focus on this?
Julie: I’m an accountant, first and foremost. I like to joke with my team that my superpower is numbers, [00:04:00] specifically, seeing the story within the numbers. When I look at a profit and loss, a balance sheet, or any financial report, I vividly see what is happening in a business. I think that is a superpower in a lot of ways.
Helping business owners with their businesses, make sure they have a profitable business, increase their profit, I see that as a service to the business owner, their communities, their teams, their clients, and everyone around them. That’s my jam.
I grew up in a house with a mom who is a serial entrepreneur who did not understand the financial side of running a business. I’m probably very cautious because of that, but the numbers can help you in whatever you’re doing in business.
Dr. Sharp: I love how you frame that and say that you see a picture in the numbers or see a story in the numbers. I don’t think [00:05:00] that a lot of people have that superpower, but it’s very descriptive. I like it.
Julie: That’s how I see it in my brain, at least. Some people hear colors or something like that. This is my thing.
Dr. Sharp: It’s a special version of synesthesia. We’ve already piqued my audience’s interest and are thinking about what’s going on in your mind.
Tell me a little bit about the focus with mental health folks and Green Oak as your firm. How did you come to dial in on mental health folks specifically?
Julie: Initially, when I started my firm, I was a generalist, but I realized quickly that it is challenging to work with all different kinds of businesses. A mental health practice versus a restaurant versus a car dealership. They’re all very different in the challenges that they face, all the other little pieces. And [00:06:00] so, I knew early on that I wanted to focus on one specific area.
At the point that I was making that big decision, I had several therapist clients, and they were all so lovely. I really enjoyed them. They had all come to me through referrals. I started with one and then it turned into 5 and probably 10.
Here are the characteristics that I loved. They were all obviously highly educated, very smart people, but really with a lot of insecurities when it came to money and managing the financial side of the business. They were also very receptive to the information. They wanted to learn. They were keen to understand what was going on under the hood of their practice. They were also willing to do the work of changing things, adjusting, and listening to advice.
I will say, I can’t think of a single client that implemented everything we ever said, but they were generally willing to do the [00:07:00] things. That created a lot of positive impact, and I just find that very fulfilling. I tend to like that educational relationship where we’re working together. We’re going to do the work for you, but I want you to also understand what is happening and why we’re doing what we’re doing. The mental health community was receptive to that. And so that became our main area of focus.
The further down that path we went, the more we realized that we could make a big impact because we know how to run a private practice so well at this point. You get on the financial side, but still, that’s a big piece, like cash flow, taxes, and how to hire people. Those are big, important parts of running a practice. That’s why we ended up sticking with that. To this day, that’s all we serve. We only work with private practices, and they’re related adjacent businesses, right? [00:08:00] There’s a lot of real estate transactions that happen with that or maybe coaching businesses that are just adjacent, but we don’t take on any clients that are not therapists.
Dr. Sharp: Right. It’s a parallel with our clients for those of us who do therapy. You want to work with folks who are receptive to what you are putting out there, open to change and self-reflection, all those things.
Julie: Yes. I imagine that is what you would want. That’s also what I want as well.
Dr. Sharp: Yeah. Good general qualities. Do you find… I don’t know, in talking to a lot of businessy folks outside our field, it seems like healthcare people, whether it’s physicians, dentists, therapists, psychologists, or whatever, have less of a mind for the practice management side, the financial side, than say a restaurant person or a car dealership person. I don’t know. Would you say that’s true?
Julie: I guess I would [00:09:00] personally disagree. That’s from my lived experience, not any specific data other than that. I think in any industry, there can be folks who are financially minded. There are plenty of doctors, dentists, and restaurant owners that are. There are also, in every industry, plenty of people who are not.
I think therapists specifically tend to give themselves the label of Oh, I’m not good with numbers. I’m bad with math. Usually, it’s just because you haven’t tried yet, right? You are very capable of understanding. Sometimes, maybe it’s just a story they’ve told themselves, or they were not good at math in school.
But there’s very little actual calculating or multiplying or any of that in the financial side. It’s just looking at what is happening and course-correcting. And that’s a skill that you use a lot [00:10:00] as a business owner, period. What is happening? How do we adjust? You’re always moving. There’s never a status quo for too long. And so, it’s a very transferable skill. I think most therapists are very capable of learning and getting to that point as well. There’s also plenty of doctors and dentists that are very bad with their money.
Dr. Sharp: That’s fair. I think there’s an emotional component involved with everyone probably, but money’s pretty emotional, and it can be something to be avoided or revered and any number of things in between.
Julie: I think maybe also doctors and dentists perhaps get away with it. People think they do better with it because they generally tend to make more money. That is a service that is more valued by health insurance companies and by society. I’m not saying that’s a good thing, but in general, a doctor can go out there and generate multiple millions of dollars per year in [00:11:00] revenue, whereas one single therapist can typically not do that. So I think the doctors and the dentists of the world maybe can outearn their lack of knowledge sometimes. It doesn’t show quite as keenly.
Dr. Sharp: That’s a good way to put it. Yeah, more money can hide money mistakes sometimes.
Julie: It absolutely can. You can outrun bad financial decisions.
Dr. Sharp: It’s a good way to put it. Maybe we’ll come back to that at some point. This sounds good.
I do want to talk a little bit about Profit First. I don’t see this interview as a Profit First primer necessarily. Your book is great for that. I’ve recommended it to a million people. There’s the general profit first book, of course. There’s a lot out there on Profit First. I don’t want to go super deep into it, but for anyone who may not have heard of it and have some idea what we’re talking about here, I think it is probably important to lay a little bit of groundwork. Can you do a high-level overview of this Profit First [00:12:00] system and what it is?
Julie: Yes. Profit First is the general premise that we are building in profit into your practice from the very beginning to make sure that there always is profit.
In the mental health industry specifically, there is a lot of guilt often around profit. Oh, I’m not in it for the money. I’m in it to help people. That’s very kind, generous, and noble, but in the real world, if you need money to live, which most of us do to pay the bills, support yourself and your family, put food on the table, gas in the car and all the things that need to happen, making a profit is necessary for business to survive.
There’s not this mythical pot of money where you’re going to go grab extra cash because you’re running your business poorly, right? There’s a point where the business fails, it closes, it does not survive, and then it helps no one. So, to help your clients, you have to have [00:13:00] profit in the practice.
Within Profit First, we turn the traditional accounting equation upside down. Instead of looking at income minus expenses equals profit, the profit first equation is income minus profit equals expenses. We are building in profit, and that means you have less available to spend on expenses, but that means that you’re always building in profit.
Typically, what most business owners do in that case, when there’s less available for expenses, is to get creative, and naturally, you will spend less because this is what you have available. It’s just like when you’re a kid, if your parents give you an allowance, that’s what you have available to spend. So you have to figure out how to make that work. I don’t know about you, Jeremy, but my parents, if I went to them and said Hey, I already spent my $10. I need more. They would say, “That’s a you problem. We’re not giving you more money.” Were you in that same boat?
Dr. Sharp: Oh, yeah,100%. I said that to my kids 3 days ago.
[00:14:00] Julie: Yeah. It’s like, oh, that sounds like you need to go do some chores or do something else. The business is the same. When there’s no more money to spend, in the current economy, it’s easy to go out there and get credit cards and loans and all that, but when there’s no money left in the business, it’s the business telling you something is going on. Something is wrong that you need to fix. You can’t just keep doing the same thing, borrowing money and hoping that it will magically get better. You do need to correct course.In a nutshell, Profit First is a system that gives you buckets or allocations of money to spend on various things in your business. There are five of those things.
One is operating expenses: your overheads like your rent, your software, your liability insurance, the things that it takes to run your company.
Then, there is your payroll. If you have a group practice, you will have payroll. It will likely be the single largest expense on [00:15:00] your P&L, so that is for your clinicians, for your admin, for your leadership. Then there is an owner’s pay bucket. So how much do you save to pay yourself for the hard work that you do in the business?
There’s a tax bucket or allocation, and then there’s a profit allocation as well.
We assign a specific percentage to each one of those things, depending on the size of the practice and the specifics. But that means that it’s easy to know at a glance how much you have available for each thing. Where is there opportunity? Where can you no longer spend anything? That’s the nutshell version of it.
Dr. Sharp: That was a great summary. I think a lot of people probably have some idea of Profit First and what it is, or they’ve read one or both of the books and get excited about it and then get overwhelmed by it. I’m sure you’ve heard this [00:16:00] 100 times more than I have, but do I really have to open five bank accounts?
Julie: That’s a question that comes up often. A lot of business owners remember the first time you go to the bank to open up your business bank account, it’s a pain. I will admit it is. It is a pain. And in part, that’s because of banking regulations, anti-money laundering. They have to make sure that you are who you are and you know who you’re supposed to be. But opening additional accounts is usually a much, much smaller lift. It is usually a 10-minute visit or even a phone call instead of a 90-minute situation. I just want to put that out there because adding accounts is not as big of a deal.
But Jeremy, there’s something really powerful about seeing the money in the different bank accounts, doing profit first on paper or in a spreadsheet or your [00:17:00] head does not. When you’re doing it on a spreadsheet, it’s easy to say Oh, this is not quite working. I’m just going to change this number over here.
I’m like, oops. Oh, look, now there’s plenty of money for all the things where you’re “borrowing” from your tax account for something else. You’re like, because you’re not going through the pain of logging into your bank and transferring money from your tax account to your payroll account because that doesn’t feel good, right? It feels like, why am I having to do this? But that’s the point. That is the system telling you something is up. Why are you having to use your tax money to make payroll? What is happening?
Profit First won’t fix the project magically, but it will tell you there’s a problem, and it’s over here. Go look over here; this is the account that’s giving you a problem, and so something has changed, good or bad. Sometimes it is, hey, [00:18:00] why is there no money coming into the practice? Is there a billing problem, or did you hire more admin than you really can afford? Did you increase leadership at a rate that doesn’t make sense? Is overhead increasing exponentially faster than your income? Something is up, and it will point you in the right direction so that you can, as the business owner, make the best decision for your business.
Dr. Sharp: Yeah. That’s one of the things that I love about it. Full transparency: we’re not running Profit First to 100% fidelity. This idea of knowing where the money should be going, in general, I think is a lovely idea, and it can throw up those red flags because, like you said, there’s information in the numbers. If you have a sense of where the money should be allocated and how much should be in each place, if it’s not there, that’s a real sign that something is going wrong [00:19:00] or going well; sometimes it goes in the other direction.
Julie: That’s true. Yes. I love those scenarios way better. I also live in the real world. I own an accounting firm, and we work with hundreds of clients. And so we see the reality of sometimes you just have to take the tax money to run payroll. Sometimes, that is the situation that you are in, but because it’s not all commingled, you are so much more aware as the business owner that something is up, and we cannot keep going in this direction. That in itself is powerful.
I was just working with a team on a new-to-us client who took on a ton of debt in the last year, and we all collectively were raising the flags that this is not a healthy situation. We have to be able to course correct this in a very short amount of time, or else [00:20:00] there’s a day very soon where there are no more loans to be had. There is no one else who will loan you money, and if you haven’t stopped the bleeding before that point, that could be the end of the business.
There are plenty of scenarios where we catch a practice early enough that we can help with that course correction, and there are some cases where it’s just so far in that we can’t move fast enough to do that. I hope this is not that kind of situation. But there are a lot of changes that have to be made in a very short amount of time to get this back on track.
That’s often a painful process for the owner because there are changes in the business. There are also usually changes personally that have to be made as well. There’s often some personal spending that has ballooned, or something else has been going on; the personal [00:21:00] expenses have expanded faster than the profit of the business. It’s not an easy scenario to be in, but Profit First can help. It cannot save a practice, but it can help get back on the right track.
Dr. Sharp: Certainly. There’s a lot of shame wrapped up in money. I’m sure that a lot. It’s people being afraid to share things with you or be transparent. It’s complicated. A lot of respect for the work that y’all are doing.
Julie: Listen, I could never do what you do. This is my jam, but the numbers don’t lie. Once we look, we see what’s going on. And these are not easy conversations to have, as I’m sure you can imagine, but there’s a lot of power in just saying it out loud sometimes. Hey, here’s what we’re seeing. Does that feel true to you? [00:22:00] Does it feel like we’re explaining what you’ve been feeling but not necessarily able to put it into words? It can be a relief to know and have someone on your side helping you out.
Dr. Sharp: For sure. One of the things that I like about Profit First is that it is pretty clear about different stages of practice and what allocation of your revenue should be going to different places like overhead or profit or owner’s pay, taxes and so forth. One of the questions that people ask me that I don’t know the answer to is, how do you arrive at those percentages? How do we know that those are “accurate” for mental health practices?
Julie: Or, how do we know you’re not full of it, Julie?
Dr. Sharp: Right.
Julie: We do a lot of research internally every single year and have come [00:23:00] up with these allocations based on many years of data.
When we work on this, this is not just what the top 5% of practice owners are doing or the bottom 5%. We look for statistically relevant practices. If someone had a loss of $200,000, we cannot include them in here because it’s going to skew the averages so much more. Also, there are some practices out there that are insanely profitable, that’s amazing for them, but that is not the average, so we exclude those as well.
So we end up in this middle of what are most people able to do realistically? What is a realistic, reasonable expectation? We arrive at averages. We look at the median and the mean and then look at do 90% of our middle fall in that range. Typically, that is possible. That [00:24:00] is the case. And so we actually have not changed the Profit First allocations since 2023 because they still continue to be relevant.
Now, I do often get some pushback of Oh, that’s not possible; you can’t possibly make that much money. Or you can’t have a 20% profit margin if you make $5 million a year.
I would say, if you were telling yourself that, then it’s probably true for you, right? If those are the words that you are using for yourself, you’re probably making that true for yourself.
We have these numbers because we know that they are possible. We can’t share that data, but for every size of practice, we have dozens of practices doing just that. And so, we know that it’s possible, and we know that adjustments sometimes need to be made to arrive at that. If you’re willing to do that, you can do that too. If you’re not willing, you can choose to have a lower profit margin. That [00:25:00] is a choice that you can make, but I’m going to advocate for profitable practices until the day I hang up my hat because that is in service to everyone.
Dr. Sharp: I like your use of the word choice and choose. I think we get locked into things. We get locked into: I have to have this much admin support. I can only charge this much private pay, or I have to take insurance, or I have to pay for this EHR or whatever. Choice is a big part of this. There are a million choices that we can make along the way with how we’re spending and making money in our practices. So I just want to highlight that and encourage folks to always have the possibility of choice on the table.
Julie: It’s so interesting to hear that business owners feel like they are trapped. I have to give them a raise or they’re going to leave, but are they? Sometimes that’s true [00:26:00] but if you’re building a business that does not rely on one specific person, including you in the best case scenario, then it does suck to see someone leave, but it’s not the end of the world. You have to make the decisions that are best for the business, and that’s what the gig is. When you’re the business owner, sometimes you have to make a decision that’s going to be not good for one specific person but for the benefit of the whole team.
If you’re okay throwing off all of your ratios or paying someone a dollar amount that does not make financial sense for the practice, that is to the detriment of the entire business and everyone that it supports. And sometimes you have to make that hard call and say, I feel like I can’t and I’m going to lose them, but I still can’t do that.
Dr. Sharp: You’re bringing up so many good points. I am going to [00:27:00] highlight two things that are maybe basic-ish, and then we can move on to some more advanced stuff. One thing people always ask is, what is my profit margin supposed to be? It has become a measuring stick, I think, for practices and a point of pride and so forth.
So just for the record, can you share some information about a “typical” profit margin for a testing practice. You know testing; you work with a bunch of testing practices now. What should we expect for a solo practice, maybe somebody with an employee or two, and a little admin support. We can take each of those.
Julie: We look at testing practices on a regular basis as well. We don’t have enough solo testing practices to have a recommendation. So it is not statistically significant. And so, I cannot make a pronunciation. When it comes to [00:28:00] general mental health, what we typically see as a solo practice is around 30% to 50% of income. That should be around your take-home pay. It can go higher than that, but that’s where we see most regularly or right around 50%.
When it comes to a small group with maybe one clinician, an admin, or something along those lines, that is usually closer to 30%. It just keeps going down just because you have to pay other people. And so that’s going to change. In a small group, the owner is still doing a significant amount of the work as well, right? And so 30ish percent is what we will often see. It’s not possible to have a group where there’s one or two part-time clinicians and the owner’s not seeing clients. That’s not a thing. There’s not enough revenue coming into the practice to support that.
Then, as we grow towards [00:29:00] a million plus dollar practice, we usually see, specifically in testing, a 20% to 25% profit margin. And in that, I’m including owner’s pay and profit margin. So, not necessarily from a Profit First standpoint, but I’m looking at the total taxable income that the owner reports.
So if they have an S corporation, for example, that will be their owner’s wages and benefits that directly benefit them plus the profit margin. If they had a single-member LLC or PLLC, that would be the profit on the profit and loss, right? Whatever mechanism or vehicle you use to take that money home, I’m combining all those to compare apples to apples, but you have 20% to 25%. It’s typically what we see. Whereas for traditional mental health practices, we see a number that’s lower than that. So there is the opportunity for more profit in a testing practice, [00:30:00] which came as a surprise to me, honestly,
Dr. Sharp: It is surprising because the overhead is higher, I would think, because we have to buy materials, whereas therapists don’t buy materials. Do you have any hypotheses about why the profit is higher even with the higher overhead?
Julie: The overhead is higher. However, we typically see clinical payroll be lower in general in part because of the way the services rendered where there’s theoretically more technician hours than direct one on one from a master’s level therapist. Because of that mix, the clinical payroll tends to be lower.
Dr. Sharp: That makes sense. If there’s anybody out there listening, thinking about taking on a psychometrist, it is more financially viable.
Julie: Yeah, it is. I have to turn the [00:31:00] table on you a little bit. Have you found that to be accurate in your practice?
Dr. Sharp: Oh, sure. We compensate psychometrists less than licensed clinicians, certainly. From a financial standpoint, psychometrists are a great choice for a testing practice. There’s some debate about the clinical accuracy, but that’s a debate that we don’t have to get into […].
Julie: Yeah. I am not completely for that piece of it. But we generally see testing practices have a clinical payroll that’s around almost 10% less than a traditional mental health practice.
Dr. Sharp: Got you.
Julie: So that’s where the difference is. Yes, you are higher in overhead, but you compensate for that in the reduced payroll.
Dr. Sharp: I could see that. I could be [00:32:00] totally missing this, but I wonder too, if there’s something around like the private pay rates for testing typically go higher than for therapy, and then payroll as a percentage of income might be relatively lower because the income is higher, the fees are higher. So you can maybe pay people a little bit more, and it’s still not as much of payroll, if that was followable.
Julie: That’s a really great point. I always find that it’s just a little bit harder to track directly for testing practices because it’s usually we’re going to do all of these things. And if there is insurance involved, the way they get submitted to insurance, it’s it’s just a little bit less obvious. It always feels like… It’s not just, okay, this hour was for this code, right? It’s multiple codes all the time. It’s just a little bit harder to trace.
[00:33:00] Dr. Sharp: Yeah. I hear you.The other thing I was going to ask you about that we were touching on is, I know there are people out there who are listening and are on the edge of their seat about am I doing okay? Are there any red flags that people need to be aware of? If they’re looking at their numbers or if they’re even looking at their bank accounts or whatever in running their practice, money issues that you can identify. Hey, if this is happening, you should probably take some action and do something different.
Julie: Probably talk to someone.
Okay. Two things. First of all, if you are hit with NSF fees, non-sufficient fund fees, on a somewhat regular basis, something is up. You’re spending more than you make if you have negative profit on a regular basis. But sometimes you don’t even get to that point because you’re just [00:34:00] not looking and so, the NSF fee is a better canary in the coal mine of okay, there’s not enough money in this bank account, especially if there’s just the one bank account. That tells you something. Something is up.
It’s not always what you think. Sometimes, the thing that is up is you’re spending way more personally than you thought you were, like you were taking so much out of the business that you are putting it at risk. I’ve seen that happen plenty of times. It could be so many things. It could be fraud, it could be a team member that’s getting paid for way more hours than you expected that they were; an administrative team member. It can be just so many different things. It could be Blue Cross has stopped paying you or you’re United, but you just haven’t noticed yet. It could be your biller disappeared. It could be a million and one different things, but if cash flow is really tough, you [00:35:00] probably need to take a close look at what is going on.
If you have a hard time paying for taxes, paying either your your tax due with your return in April or your quarterly estimated taxes is also a sign that something is up because if you are looking at the financials, if you’re saving on a regular basis for taxes, you should be in the ballpark, plus or minus a little bit, but it should not be a surprise. It should not be an unexpected thing because taxes are never unexpected. We know they’re coming. We know it’s going to happen. And so that probably just means you’re not looking closely enough.
I say that with absolutely no judgment. One year of really big unexpected tax payment or tax bill can set you back for literally years. It can take years to catch up from that.[00:36:00] So the more proactively you can take a look at that, the better off your practice will be. And then you’re not accidentally spending your tax money. I am using air quotes again, even though some of you might not be able to see it. Sometimes, it can feel like there’s money in the business that you can take out, but what you’re actually taking out is tax money because you just haven’t been thinking about it or planning ahead for it. It was never your money to start with, but it’s already gone. And so what do you do now? Those are two big items.
If you’re stressed out every time you run payroll because you’re not sure if the checks are going to clear, something is going on also. It’s time to take a cold, hard look at what is happening. If you find yourself writing manual checks because it’s going to give you two extra days, that’s not good. And so again, without any judgment, those are [00:37:00] flags that your business is waving, saying help me. I need something else from you at this point in time.
Those are all some signs that I can think of.
Dr. Sharp: Great. That sounds good. Maybe we wrap this basic intro section with, folks are hearing some of these things, and they’re like, I want to take some steps to be better about this. Is there an easy intro to Profit First or a way to get started?
Julie: Reading the book is a very accessible way to get started. Just hear more about it. There’s a paperback, an audio, and an ebook as well. So those are some items. I do think it’s better to read the book or have some kind of knowledge before starting so that you set it up correctly. But I am very much [00:38:00] okay, and I say this in the book, if you feel overwhelmed by the whole thing, start with a profit account and a tax account. Just add those two. Maybe you don’t go all in. Again, no judgment, just those two things: having a little bit of money in a profit account that serves as a reward and an emergency fund for your business and starting to put some money in tax, it’s not going to maybe cover your will tax bill, but something is always better than nothing. And so that’s a good way to gently ease your way into it.
Dr. Sharp: That’s very doable.
Julie: Easy enough, right?
Dr. Sharp: It’s so easy.
Julie: Totally doable.
Dr. Sharp: I do want to flip the script a little bit. A big part of reaching out to you is that I think there’s a lot of basics out there and books, like I said, but I would love to talk about what happens next. What if it’s actually going well? What are some more advanced strategies [00:39:00] for folks out there who feel like they have a pretty good handle on the basics?
Maybe we start there with a general open question, which is, let’s say somebody is running Profit First and or has a good handle on their finances. They are pretty consistently hitting that 20% profit margin. What happens next in terms of optimizing cash flow or advanced fun things you could do with the money in your practice?
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All right. Let’s get back to the podcast.
Julie: I love that. There are two different options, and I want to just blurt them all out.
There is expansion, there is living your best life, [00:42:00] and replacing yourself. The three top things. One is, things are going really well. Do we want to do more of this? And there’s no right or wrong answer in my mind. It’s just, what do you personally want? It could depend on your age, on your family situation, just where you are in your life. Are you loving the business at this stage? Do you want to just keep doing this?
In which case, you could add, for example, an expansion bank account where you don’t need to take home more money. So you just start stockpiling money over there in this expansion account. We have several clients who do this, and when they get to a specific amount, then they start looking for a new location. For some, that’s $50,000, for some it’s $ 100,000. Okay, there’s $100,000 in this account. Let me go look at where we are going next. Is there a new city, another city close by that we want to expand into and open up a new office there?
Sometimes it can [00:43:00] be a building. There are a lot of practice owners who also own the real estate. I think you have to be in a really strong personal financial position for that to make sense just because you don’t want to contort your practice to fit the real estate, and that often happens when you own the building. I think you should just go to whatever location that is going to be best for your business versus the other way around, like restricting the business to fit in the real estate that you already own.
If you’re in a good financial position, you’ve got the 20% or 30% down that a commercial real estate deal is going to require, you’re doing retirement savings, you’re doing other things already, this is another great way to diversify your portfolio. Go for it. Do it. But sometimes, that could be a different kind of real estate deal that’s not commercial. Maybe you want [00:44:00] to buy residential real estate or a second home or whatever that may be. A home that you’re going to Airbnb, cool. Go ahead and do that. Save money to do that.
There are other cases where things are going so well. You decide, I love this business. It’s going. I’m willing to take a little bit less money home. I’m going to replace myself in this business, and I’m going to take a more passive role because I have this other cool project that I want to go work on over here, or I just want to golf or I don’t know, play pickleball or whatever that may be.
Again, I don’t think there’s a right or wrong answer. It’s just based on what you want to do with your life. All of those are options when you have a cashflow-positive business, which is a great place to be.
Which one of those resonates with you? I’m curious. Which one would you pick out of those scenarios?
Dr. Sharp: They all sound [00:45:00] appealing. Oh, gosh, that’s a tough question. You’re not allowed to ask questions, Julie. I’m the one that asks the questions.
Julie: I know this. I like to turn the mic around for a second.
Dr. Sharp: Yeah. It’s a good one. I think the place that I’m at right now, I would honestly buy back time. So I would, maybe that’s replace myself. Maybe that is just not doing any more clinical work. I don’t do a ton, but gaining 5 or 8 hours a week would be helpful. I might funnel some to my personal life to hire, I’m just being direct, maybe a chef or an executive assistant or something. The biggest precious commodity right now is time. And so anything I could do to buy time would be amazing.
Julie: So you are not in the golf and pickleball place, but buy back time for yourself, maybe.
Dr. Sharp: Yeah. And then maybe I would play Pickleball.
[00:46:00] Julie: Oh, there you go.Dr. Sharp: Buying back time would be amazing.
Julie: Yeah. And that’s often not as expensive as people think it will be. Sometimes, it’s just a time audit. What are you spending your time on? Could you hire an assistant who can do 5 hours a week of that stuff that you no longer have to do? Sometimes, it’s much deeper, like hiring a clinical director who is stepping into your leadership shoes as the owner, whether you’re seeing clients or not, and replacing you where you are acting more as an advisor to them. They are leading your company and you’re maybe in it two hours a week. We have multiple clients who are now in that situation as well, where it’s almost like a semi-retired position. There’s a lot in between those two things as well.
I’m in the stage of life where [00:47:00] my kids are all in school, and I’m realizing just how quickly they will be out of the house. I just have a handful of precious years. So I’m in the same boat as you. I want to be around, work a little bit less, have dinner with my family every night, travel a little bit less, and all of that.
Dr. Sharp: I think we’re in a similar place. I think our kids are similar ages.
Julie: Our kids are almost the same age. My oldest will be a high schooler next year, which feels like the clock is ticking. 4 years will go so fast.
Dr. Sharp: It really will. We sat down, my wife and I, probably two months ago and mapped it out and mapped out all the school breaks between spring break and summer. We get a Thanksgiving break. We figured out we essentially have 15, maybe [00:48:00] 18 opportunities to take a trip with our kids before they move out. That his home. I’m in the same boat. That really drives a lot.
Julie: 15. That’s just hit me right in the heart.
Dr. Sharp: Oh my gosh. I didn’t mean to…
Julie: No, that’s okay.
Dr. Sharp: … put this into an existential dilemma but that’s a big motivation.
Julie: Got to make the most out of our time.
Dr. Sharp: I’m with you. I love those options. It gives people a choice if things are going really well.
I want to detour a little bit into the expansion question because I feel like that is where a lot of people default to. If things are going well in a solo practice and the money is pretty good, then a natural question is, now do I have a group practice? Do I hire someone? Do I go in that direction? What have you seen people mess up essentially in that [00:49:00] transition to a group, especially from a financial standpoint? Are there any things that jump out when you see people start to hire and expand?
Julie: A lot. If I had a nickel for every time I’ve heard, I want to hire or I want to start a group practice because I want passive income, I wouldn’t have a lot of nickels. There is nothing passive about a group practice. There’s nothing. It is so much work. It is worth it, and you can make money, but there is a 0% passive. There is so much work to get done before that point of passive revenue.
Typically, to be able to step away from your practice, you will typically need to be making at least $3 million a year, if not more, the practice to generate that kind of revenue. Before that, you cannot afford all the pieces and all the bodies to replace the work that you do. You will not have enough [00:50:00] systems that you can truly step out and not enough redundancy, not enough overlap, right? You can maybe step out temporarily for a few weeks, but if your biller quits, there’s one biller. And so, guess what? You’re back in that seat. So it’s not long-term. You’re not long-term out. So, to have enough seats at the table to be able to truly step away, it takes a pretty large group practice. So the passive piece though is number one, like expecting that you’re just going to hire someone and then magically you’re going to make a lot more money.
Practice owners also underestimate how many clients they are going to need to see when they hire someone. If you’re seeing a full caseload and you hire one part-time clinician, guess what? You still have a full caseload. You can afford to reduce by zero clients. There is no room.
I often get that question from [00:51:00] small groups where they have two part-time clinicians. Hey, can I stop seeing clients? Absolutely not. The math doesn’t math. You can’t. I know it’s hard though, because that’s the hardest, like that small group practice where you’re just getting your sea legs and figuring out your processes and procedures and your handbook and your policies, that is by far the hardest part and it is the least rewarding. You are working so hard, you’re wearing so hats, and you are making marginally more money, if any. There are plenty of cases too where you’re making less money than before.
And so we often see at that inflection point that a decision needs to be made. Either you’re going to stick with this and keep growing where you have enough sessions, enough revenue to be able to afford a bill or an intake like additional services, or you have to make the decision that this is not for you and go back to solo and manage everything [00:52:00] yourself.
I remember I had a group practice client years ago who had 12 clinicians and was still doing all of the intake literally from 7 a.m. to 7 p.m. for 12 clinicians.It was never a seven days a week also. That was probably too long, right? She did that way too long. And one of the first things we told her is please hire an intake coordinator. You can afford it. Please go ahead. If you made $50,000 less next year, would that be okay with you to get your life back? And yes, that is absolutely what she wanted, but that in-between part, you are as the owner filling all of those seats out of necessity because there is not enough money to add a lot of things.
I think it [00:53:00] absolutely can be worthwhile, but you have to go in with a clear head and clear expectations. And if you’re not willing to put in the work to get to the other side of that, then maybe it’s not for you, or maybe now is not the right time for you. All of those things are completely okay. If you know what you’re getting into, it makes it a lot easier.
Dr. Sharp: Yeah. I appreciate you saying all that. The $3,000,000 number is interesting. I’ve never heard of that threshold as far as what you would need to step away. I don’t know how I came up with this, but a few years ago, I had it hit pegged at 7x your individual income would allow you to have some kind of passive. I don’t know. It’s not as precise, but that kind of makes sense. $3,000,000 is a solo income of $300,000 to $400,000, which maths.
Julie: Yeah, in that ballpark.
Dr. Sharp: I think that’s good to know.
[00:54:00] Julie: That’s not a perfect science number either, but it’s more of, is there a clinical director in place. At the $3,000,000 mark, there probably is. You probably have, if you have multiple locations, a site supervisor for each site because you’re not there as the owner every day. That site supervisor is seeing clients, but they’re not seeing a full client load. Do you probably have a 3 million, 1 to 2 intake, and 1 to 2 billers?You have those redundancies in place so that if even if someone’s on vacation, you’re not the one being tapped on the shoulder to cover those pieces. There’s multiple layers at that point. There are good systems in place. It’s hard to grow to $3,000,000 a year without… You have systems around hiring and recruiting. The things are working like clockwork in many ways. It’s never perfect. Things are going to break, but there’s [00:55:00] generally a way to do things that other people know.
Dr. Sharp: Right. Systems are so valuable.
Julie: Yes.
Dr. Sharp: Speaking of the group, the last question I’ll ask about expanding into a group is the compensation. The 60% number is floating around everywhere. It’s like, we need to pay our clinician 60% of revenue. I would love to get your perspective on the range of compensation, we’ll stick to W2 for now just to keep it simple, but the range of compensation that can be reasonable.
Julie: My recommendation is for a fully licensed clinician that they should be paid somewhere between 45% to 60% of the revenue they generate. 45% to 60% includes wages, payroll tax, and benefits. So that doesn’t mean a base [00:56:00] wage of 60% because that’s going to cost you closer to 72% all in with payroll tax and benefits. And so, that means it has to be lower than 60%. I’m sticking to it. That’s my line in the sand. I get a lot of pushback on that, and my response to that is generally, you’re the business owner. I’m going to make my recommendation. You can do whatever you want. That doesn’t change my recommendation.
If you decide you want to go higher than that, that’s great. You will have decisions to make as far as where are you going to go lower? If it’s nowhere else, then that means your profit is going to be low, and that’s a choice you’re allowed to make but not one that I’m going to recommend.
Dr. Sharp: Very reasonable.
Julie: Yeah.
Dr. Sharp: I just want to double-click on that 60% is the top of the range for you, inclusive of benefits and payroll taxes.
Julie: Yeah, including benefits. And so that also means, though, [00:57:00] if you make the offer when you’re hiring someone at the very top of that range, guess what? There’s nowhere to go because that is all in unless you’re able to increase your rates or pay them with some other magic money that’s coming from somewhere else. At some point, that is going to cut into your profit margin. It just is. And so 20% turns into 14% and then 11% and then 7%, and they’re like, oops, we’re not making any money anymore. And so there is, unfortunately, a cap.
I do wish things were different. I wish reimbursements were higher. I wish mental health was valued more. I do wish for all of those things. And yet the reality is that the math has to make sense. If you’re going to hire someone and pay them more than they generate for your practice, you might as well not hire someone. You would be better off financially not to hire them [00:58:00] because you or someone else in the practice is going to have to work harder to compensate for that.
There are plenty of situations where a clinician is making more money than they generate, and that doesn’t make sense. There is an end to that because at some point, you can’t sustain that long term.
Dr. Sharp: What are some of those situations? I can maybe see it with a leadership position or someone who’s not seeing as many clients. When are you seeing people being paid more than they’re generating?
Julie: I’m going to detour a little bit. In a leadership position, those are typically going to be break-even positions, right? So, like that site supervisor, I’m usually looking for them to at least bring in enough revenue to cover their wages, payroll, tax, and benefits. That means you have to have enough other people on the team to contribute to overhead admin and all the other expenses of the business. [00:59:00] Usually, for a leadership position, if they can at least break even, we’re usually in pretty good shape as long as the rest of the practice is healthy.
I have been doing this for a long time at this point. I’ve seen 85% splits, which at 85%, if you add payroll tax and benefits to that, you’re right up against 100%. The highest split I’ve seen is 100%, where they were getting 100% of the revenue they generated. They were doing a couple of additional duties in the business, plus payroll tax and benefits. So that’s just digging a hole that gets deeper and deeper. These are few and far between, but it does happen.
It also can happen if you’re paying for admin time. So, you are paying a clinician for the work that they do, let’s say you’re paying 60% base and they’re seeing three clients a week, and you’re paying them for eight admin hours. Guess what? [01:00:00] They’re very little profit margin that there was in that is gone.
Dr. Sharp: That brings back memories. That was one of my biggest mistakes. When we had therapists on our staff was paying for admin time, not to that, but paying for admin was a big income suck.
Julie: Yeah. If someone is pulling their weight, seeing 20 clients, three admin hours, that’s probably not as big of a deal, but especially with those very part time clinicians, there’s so little margin already in someone who’s very part time, and then you add that on top of it. You’d be better off just not having the mental load of having that person on your team.
Dr. Sharp: Sure. I think there are a lot of nuggets in this conversation and almost like throwaway lines, but they’re important. Just that willingness to make the [01:01:00] choice. You don’t have to have that person on your team. There is a point where an employee becomes profitable for the business, and when they’re not profitable and sometimes we overlook that, Oh, I have to bring this person on, or I have to keep this person even though they want to reduce their hours or whatever it may be. That’s not always the case.
Julie: Yeah, if we have time, I generally find that 10 sessions per week is usually the break even for most practices. Where if you have a clinician who’s seeing 4 or 5, 6 sessions per week, by the time you cover all those software expenses that don’t change whether someone’s seeing 1 or 18 clients per week, your EHR, your phone, like all the things, and then your support systems as well, below that, they’re not even contributing to your overhead at that point.
And so, what I also find though is that the mental load of managing [01:02:00] someone who is seeing 5 clients a week and 20 clients a week is very similar, if not almost more for the 5 hour a week person because if the owner, especially if they’re in that intake seat as well, if you’re always wondering, can I schedule them? Are they here that day? Can we make this work? It’s more work than someone who you just know is going to be there. You have their schedule. They’re always available. Whatever it says in the EHR is accurate, and so I think the mental load is often not considered enough. If someone is not contributing to the bottom line, not really around, and it’s taking you a lot of mental energy, why are we doing this?
Dr. Sharp: Why are we doing this? That makes me think about being deliberate in this whole process. I have run into, gosh, don’t get me wrong. I made a lot of decisions that were not as deliberate or thoughtful as they [01:03:00] could have been. And I think a lot of us, especially with hiring, it’s almost reactive, and a lot of it happens without being deliberate and considering everything that entails.
Julie: I have made these mistakes, too. I’m tough with numbers, but I’m also human. Sometimes you have someone on your team that you really like, and oh, I just want to keep making it work, and it just doesn’t work. Sometimes, it just doesn’t work anymore. It’s a sad and tough decision to make, but sometimes you’re just better off for it.
Dr. Sharp: It’s true. Let me see. I may ask you one or two more questions, and then we can wrap up. This has been great. You talked about debt a lot in the beginning and how that can be a bad thing, right? Typically, people are over-leveraged and borrow to cover. Is there any situation that you have seen where taking on debt can be helpful?
[01:04:00] Julie: Sure. I’m not anti-debt. Because of my story of origin, I am financially cautious, is how I would call it. My mom went into these business ideas with abandon and not with consideration of how are we going to pay for any of this. How is this all going to work? And so I tend to be a little bit more cautious because of that.When you’re taking on debt, you are spending tomorrow’s money today. That is ultimately what we are doing. It is possible for that to make sense. Lots of folks have started businesses by taking maybe a small $10,000 SBA loan just to get them over the hump, and then get the systems in place and have the time and space to get get everything lined up to start. But when you are doing that, I think you have to have a clear path to [01:05:00] a return on investment without money, right? It can’t just be, let me take on this loan and maybe I’m going to pay myself with it and maybe I’m going to do this with it. You have to have a good plan, and you should be spending that money on things that are going to make you money.
We’re not taking out a loan to go buy throw cushions for our room. That’s not going to make you money, right? What is going to make us money? A strong website where people are able to find you easily, with good SEO that’s going to make it very clear who your ideal client is. That’s a good investment that will make you money. Having that clear vision can be helpful. We’ll suggest an in-between step.
I’m generally a fan, if someone is borrowing to start a business, I would love to see them [01:06:00] save up first, save up money and then have some money saved up for themselves and then supplement that with a loan versus just a loan, because the ability to save up money means okay, you have carved out part of your budget already, and we know that you have this money available for the business, because when you borrow money, at some point in the short future, you have to start making payments on that.
And so if there’s not even a plan for, like, how are we going to make these loan payments? You can end up in a more difficult financial situation after the loan than before the loan. But if you’re able to start saving money and have maybe $ 5,000 saved, then you take on a loan for some of it. So you’re spending some of your own money, which feels different always when you’re spending your own cash and you have the loan, you not only have a smaller payment, you’re able to save that. You were able to save that money. So you can take that same amount and work towards the loan payment. That’s my more [01:07:00] cautious in-between recommendation.
Also, for expansion, I feel the same way when it comes to expanding the business. If there are zero dollars available for you to save for expansion, you probably shouldn’t also take out a loan to expand because in a time of expansion, usually there’s a 6 to 12 month period where you are actually going to make less than before. And so if there’s today no money to even save a little bit, what makes you think that during this expansion, somehow that money’s going to appear? It usually doesn’t.
Dr. Sharp: It’s like having a baby to save a marriage.
Julie: Yeah.
Dr. Sharp: Maybe that’s too intense, but it counts.
Julie: Yeah, babies are intense, and babies are so expensive, too. I was thinking about it.
Dr. Sharp: Good stuff, Julie.
Julie: Babies make everything harder.
Dr. Sharp: Babies do make everything harder. Have you heard that Jim Gaffigan joke? We love Jim Gaffigan, [01:08:00] the Nerd Mouse, but he’s a comedian, and he has this joke that says. What’s it like to have five kids? And he said, it’s like you’re drowning and then someone tosses you a baby. I just resonate so much.
Julie: I think I’ve read that he lives in New York City in a small little apartment with his five kids, right?
Dr. Sharp: Yeah.
Julie: A very challenging-sounding situation.
Dr. Sharp: It’s a whole story. It’s a lot more.
Julie: And then you decide to have another baby. Someone throws you another baby.
Dr. Sharp: Sure.
Julie: All right. That’s fine.
Dr. Sharp: Yes. So anyway, if you’re going to expand, have some money saved.
This is great. I’m going to close with a personal question, maybe that hopefully we’ll wrap this up. I am curious. I know that, for me, the way that I’ve approached money in my practice and my life has changed pretty significantly, I think, over time. So I’m [01:09:00] curious for you being in this field, doing the work that you do, seeing all these practices, diving into the numbers, how has your own financial perspective changed over the years? Anything that you have learned along the way as a business owner yourself.
Julie: I would say I’m less debt-averse today than I was 10 years ago in the sense that I think more practice owners should have a line of credit and should get it when things are going well, right? When things are going well, we’re thinking, Oh, everything’s always going to be fine. In business, what I’ve learned is it’s not a question of if something will go wrong. It’s a question of when. At some point, something will go wrong. I just go into every day knowing that at some point, something’s going to go wrong this year. And so preparing yourself when things are going well can serve you when things are not going [01:10:00] not going so well. I have a line of credit for my business, which I did not have 10 years ago, and I always prefer not to use it, but I like knowing that it’s there just in case.
Dr. Sharp: Same here.
Julie: It’s always very interesting to see the financials and then make those micro decisions behind the scenes like, oh, I don’t want to do things that way, or, oh, maybe I could be a little bit more aggressive cause this has worked really well in this situation. I think I’ve just evolved over time, just like I have evolved hopefully as a parent, as a mom, and as a leader of the practice. I hope that I’m doing things in the right way. The right way might change over time, but at least I know that I’m doing it in a way that feels true to me and to who I am. I try to do things in a way [01:11:00] that helps me sleep all at night, and I sleep really well. I feel like if I know my team is okay and everyone is protected and my family is going to be okay, then I can sleep well.
Dr. Sharp: I like that gauge. Yes. Well, said.
Julie: And that includes life insurance and all of the things that go with that, emergency funds and the business, the line of credit, all of those things help pad everything. That’s my perspective on it.
Dr. Sharp: I appreciate you sharing that. This has been a great conversation, as expected. How can people find you if they want to talk to you or work with you or any of those things?
Julie: Yes. I also have a podcast called Therapy For Your Money. I would love for you to find that. I talk about all financial topics specifically for mental health, Therapy For Your Money. My firm is Green Oak Accounting. So feel free to check us out, GreenOakAccounting.com [01:12:00]. You can lurk and see. We have a lot of fun resources available there on the blog, but you can also schedule a free consultation with the team and see if our services might be a good fit for you. You can also find my book Profit First for Therapists on Amazon or wherever books are sold.
Dr. Sharp: Fantastic. Thanks again. I’ve really enjoyed it.
Julie: Thanks so much.
Dr. Sharp: 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.
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If you’re a practice owner or an aspiring practice owner, I’d invite you to check out The Testing Psychologist Mastermind groups. I have mastermind groups at [01:13:00] 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 website is intended for informational and educational purposes only. Nothing in this podcast or on the website is intended to be a [01:14:00] substitute for professional psychological, psychiatric, or medical advice, diagnosis, or treatment.
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