PDF Summary:Profit First for Therapists, by Julie Herres

Many therapists struggle to prioritize their own financial well-being, often compromising their income to accommodate client needs. In Profit First for Therapists, Julie Herres challenges this mindset, arguing that financial stability is essential for providing quality long-term care. She introduces the Profit First system, a cash management method that ensures profitability by dedicating separate accounts for expenses, taxes, profit, and the owner's compensation.

Herres guides therapists through reverse-engineering their ideal income, building financial buffers to weather challenges, and strategically growing their practice. With practical advice and real-life examples, she demonstrates how embracing profitability can lead to sustainable success while staying true to one's values.

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• Create a visual budget board in your home to allocate funds for taxes and essentials before anything else. By using a physical board with labeled sections or envelopes, you can physically divide your income as soon as you receive it, ensuring that a portion is immediately set aside for taxes and essential expenses. This tactile approach reinforces the habit of prioritizing these expenses and makes it harder to accidentally spend the money on non-essential items.
• Develop a "Focus Shift Journal" where you dedicate 10 minutes at the end of each day to write down moments when you felt overly absorbed by work and how you redirected your attention. This practice will help you become more aware of your focus patterns and encourage proactive shifts in attention.
• Set up automatic transfers to a high-yield savings account that penalizes early withdrawals. By choosing an account that offers higher interest rates but charges a fee for early access, you're less likely to dip into these funds for non-essential expenses. Schedule the transfers for the day after your regular income is deposited to ensure that a portion of your earnings is saved before you have a chance to spend it.
• Automate your savings with a 'surprise me' feature in your banking app. Set up a savings account that randomly transfers an unpredictable amount of money from your checking account once or twice a month. This unpredictability keeps the savings out of your regular financial awareness, as you won't know exactly when and how much will be transferred, mimicking the concept of 'out of sight, out of mind.'
• Use a visual cash flow calendar to track your designated money transfers. By marking the days on a physical or digital calendar when you plan to move money to savings, investments, or bill payments, you create a visual reminder that can help reinforce the habit. For example, if you decide every 15th of the month is when you transfer money to your savings account, seeing this consistently on your calendar can make it a routine part of your financial management.

Establishing Profit First Accounts and Determining TAPs

This section provides practical guidance on establishing the necessary bank accounts for Profit First. The author suggests using your current business checking account as the REVENUE account, where all incoming deposits are directed. She then outlines how to open OPEx (Operating Expenses), PAYROLL (if applicable for staff or contractors), OWNERS' COMPENSATION, TAXATION, and PROFITS accounts. Herres advises using business checking accounts for OPEx, PAYROLL, and PAY TO OWNER, and business savings accounts for TAX and EARNINGS. The author also details the purpose of each account and explains how to choose the target allocation percentages (TAPs) from the provided chart according to your practice's scale: solo practitioner, small, medium, or large group.

Strategies for Shifting From Current to Ideal Allocation Percentages

Herres recommends a gradual transition from your existing allocation percentages (CAPs) to your desired TAPs across four to eight quarters. This approach prevents drastic changes to your spending habits and lets your practice gradually adapt. She underscores the importance of beginning from your current situation and slowly working towards your desired allocations. Herres highlights the risks associated with starting with allocations that are too aggressive, which can cause cash flow problems and derail your Profit First implementation. She advocates for patience and persistence, emphasizing that even small incremental improvements to your allocation percentages over time will lead to significant results. Herres also warns against the common mistake of excluding payroll from Real Revenue calculations, emphasizing that clinician compensation should be an integral part of your Profit First allocations as it represents a significant expense for group practices.

Other Perspectives

• The recommendation does not consider the unique financial goals or risk tolerance of individual businesses, which might be better served by a customized transition plan rather than a one-size-fits-all approach.
• While starting from the current situation and slowly working towards desired allocations can be beneficial, it may not be the best approach for every business or individual. Some situations may require more immediate and radical changes to address urgent financial issues or to capitalize on time-sensitive opportunities.
• If a business operates in a sector with high margins and predictable revenue, it might be able to handle more aggressive allocations without significantly impacting its cash flow.
• Relying solely on small improvements could lead to complacency, where more substantial and innovative changes are needed to drive growth or efficiency.
• For businesses with fluctuating income, including payroll in Real Revenue might lead to inconsistent Profit First allocations, making it harder to establish a stable financial strategy.

Aligning Practice Finances With Personal and Professional Goals

This part focuses on strategically aligning practice finances with both your personal and professional goals. It starts by guiding you through the process of reverse-engineering your practice to earn the income necessary to support your ideal lifestyle. The author then emphasizes the importance of building robust financial buffers through the Profit First approach to withstand challenges and secure your personal compensation while also supporting reinvestment in the business.

Reverse-Engineering to Determine Desired Lifestyle Income

Herres introduces the concept of "reverse-engineering" your work to determine the income required to achieve your desired lifestyle. She provides the Lifestyle Worksheet, which lets you meticulously outline both your current expenses and desired spending in various categories, such as housing, transportation, groceries, entertainment, and savings. The author utilizes this data in the worksheet "Reverse-Engineering Your Practice," demonstrating how to calculate the quantity of client sessions required to earn your ideal net income, while considering your present compensation ceiling and typical session fees. She demonstrates how adjusting these key "levers" – session rate, number of sessions, and Owner's Pay allocation – affects the practice's revenue generation capacity.

Calculating Client Sessions to Meet Owner's Monetary Needs

Herres provides detailed step-by-step calculations to determine how many client sessions you need for the desired take-home pay. Using the information you gathered in the Lifestyle Worksheet, you first establish your desired net income, then enter your Owner's Pay Current Allocation Percentage from your Instant Assessment. By dividing the desired take-home pay by the Owner's Pay CAP, you get the monthly average revenue needed for the practice to generate. Finally, dividing this monthly revenue figure by your typical session fee gives you the precise number of sessions needed each month to achieve your ideal net income. The author provides various examples, showing how adjusting the session fee or the current Owner's Pay CAP directly influences the session quantity required. Herres also suggests repeating the exercise using the amount from your "Nice to Have" Lifestyle Worksheet to assess the effort needed for an upgraded lifestyle.

Other Perspectives

• The method may not be applicable to all types of practices, especially those that do not have a simple fee-for-service model, such as those that rely on insurance reimbursements or sliding scale fees.
• Lifestyle Worksheets may not accurately reflect all financial needs and wants, potentially leading to an underestimation of the desired net income.
• This calculation does not account for taxes, which can significantly affect the actual take-home pay and thus alter the revenue needed.
• It assumes that the demand for sessions is high enough to meet the calculated number of sessions needed, which may not be the case in a competitive market or during economic downturns.
• Increasing the Owner's Pay CAP might not be sustainable if it leads to insufficient funds for other business expenses, potentially affecting the long-term viability of the practice.
• The approach could encourage overemphasis on material gains at the expense of other important aspects of life, such as relationships, health, and personal growth.

Building Buffers With Profit First to Weather Challenges

Herres focuses on the crucial aspect of building financial buffers through the Profit First methodology. The author explains that building a "buffer," or accumulating reserved funds in every Profit First allocation, helps your practice navigate financial challenges and seasonal fluctuations more smoothly. She highlights the importance of resisting the temptation to reduce transfers when an account balance seems higher than necessary, encouraging you to embrace these surplus funds as protective cushions for leaner periods. Herres explains that these buffers act as mini-emergency funds within each account, ready to offset unexpected expenses or revenue dips, eliminating the need to scramble for quick fixes or resort to undesirable options like high-interest loans.

Protecting Owner's Compensation and Business Reinvestment

Herres emphasizes that your OWNER'S PAY allocation should sufficiently cover your personal lifestyle needs. You should resist relying solely on profit distributions each quarter for your personal costs. The author encourages you to periodically review whether your compensation is adequate and make adjustments to the amount allocated for owner compensation as needed. She advocates reserving PROFIT funds primarily for business reinvestment and expansion, while also allowing a portion for rewarding yourself as an owner of the business. Herres stresses that the main purpose of separating and prioritizing profit using Profit First is to ensure that your business caters to both your personal and professional financial needs sustainably.

Practical Tips

• Set up a separate bank account for your owner's pay if you haven't already, and automate transfers that coincide with your business's revenue cycles. This ensures that you're regularly paying yourself and can help prevent the temptation to dip into business funds for personal use. It also makes it easier to manage taxes and savings.
• Diversify your income by exploring side hustles that align with your hobbies or skills. By doing so, you create additional revenue streams that can cover personal expenses without tapping into your business profits. For example, if you enjoy photography, consider offering your services for events or selling your photos online.
• Create a compensation adjustment formula based on specific business performance indicators, such as revenue growth, profit margins, or customer acquisition rates. This takes the guesswork out of deciding how much to adjust your salary. For instance, you might decide that for every 10% increase in profit, you'll give yourself a 2% raise.
• Create a reinvestment plan that outlines specific goals and the required budget to achieve them. This could involve researching new equipment, technology, or training programs that could expand your business's capabilities. Once you have a plan, you can allocate your reserved profits accordingly, ensuring that every dollar is spent with a clear purpose in mind.
• Create a "Profit Reward Chart" that outlines incremental rewards for different levels of profit. This can be a fun and motivating visual tool, similar to a fundraising thermometer, where you set benchmarks for profits and corresponding rewards. For instance, once your business hits a $5,000 profit, you might reward yourself with a nice dinner out, or at $20,000, you could book a weekend getaway.

Scaling and Expanding a Successful Private Practice

This part explores the intricacies of scaling and increasing a therapy business's profitability. Herres emphasizes that expansion must be a strategic decision, informed by meticulous planning and a solid financial foundation. She outlines a three-step approach to scaling – planning, action, and the new normal – and addresses common financial bottlenecks that can hinder growth, offering solutions to overcome these challenges.

Expanding Locations, Team, and Revenue Streams Profitably

Herres advocates for a strategic and calculated approach to expansion. She argues that profitable growth requires a solid understanding of your finances, realistic expectations, and meticulous planning. The author emphasizes that the thrill of expanding shouldn't overshadow the necessity of a sound financial foundation. Herres warns against blindly pursuing growth without carefully analyzing the financial implications, stating that expanding an unprofitable clinic only amplifies existing problems. She encourages practice owners to consider a long-term approach and build a business model that's financially successful before aggressively scaling, ensuring lasting success.

Planning and Budgeting: Avoiding Problems With Expansion-Related Cash Flow

Herres stresses the importance of careful planning and budgeting during expansion to prevent financial difficulties. She outlines a comprehensive list of costs to consider when expanding locations, providing benefits for employees, hiring clinical staff, or bringing in administrators and leadership personnel. Herres highlights the importance of understanding lease terms related to buildout allowances, whether they're provided by the landlord or financed by the practice owner. She cautions against neglecting the substantial expense of furnishing and decorating fresh work environments, offering practical advice to manage these costs effectively. Herres also advocates for the creation of a dedicated EXPANSION account within your Profit First strategy, allowing consistent allocation of funds to cover expansion-related costs, reducing financial stress and ensuring you have the necessary resources for a smooth transition.

Practical Tips

• Set up a monthly 'expansion review' with a trusted friend or mentor. Discuss your progress, challenges, and financial status. This accountability can help you stay focused on your budget and make smarter financial decisions. If you're expanding your online store, use these sessions to evaluate your spending on inventory, advertising, and platform fees, and get feedback on potential cost-saving measures.
• Use online resources to draft a sample job description for an administrator or leader in a new location. Research the necessary qualifications and responsibilities for these roles and write a job description as if you were actually hiring. This will help you understand the level of expertise required for these positions and the potential cost of attracting the right talent.
• Simulate lease negotiation scenarios with a friend or family member. Take turns playing the role of the practice owner and the landlord, focusing on the buildout allowance aspect of the lease. Practice negotiating terms, such as the amount of the allowance, the scope of work covered, and the timeline for completion. This role-playing exercise can boost your confidence and negotiation skills, preparing you for real-life discussions.
• Create a virtual mock-up of your workspace using free online room design tools before making any purchases. This allows you to experiment with different layouts and design options without any financial commitment. For instance, you might find that rearranging your current furniture in the virtual space meets your needs, eliminating the need for new items.
• Implement a phased furnishing approach by prioritizing essential items first and gradually adding decorative elements over time. This spreads out expenses and allows for better financial planning. Start with the absolute necessities like desks and chairs for a functional workspace, and then slowly introduce art, plants, and other decor as your budget allows.
• Create a visual tracker to monitor the growth of your expansion fund. Use a spreadsheet or a chart on your wall where you can record each contribution to your expansion account. Watching the progress can be motivating and give you a clear picture of how your expansion savings are developing over time.
• Engage in a monthly financial "fire drill" where you simulate living on a reduced income for the period of your transition. Transfer the difference to your dedicated account to build resilience and adaptability. This exercise not only boosts your transition fund but also helps you adjust your lifestyle in preparation for the actual transition.

Emotional Growth and Profit First in Financial Stability

This final section explores the business owner's emotional experience applying the Profit First approach and achieving financial stability. The author emphasizes that Profit First goes beyond a set of financial rules; it's a process that helps practice owners develop a healthier relationship with money. This journey involves navigating various emotional stages—from the initial excitement to moments of resistance, overwhelm, and ultimately, fulfillment and satisfaction. Herres encourages you to embrace this journey, understanding that financial stability not only supports your business, but also fosters personal growth and a deeper sense of confidence.

Addressing Financial Bottlenecks That Hinder Scaling

Herres delves into the common financial obstacles that hinder scaling and growth, offering effective solutions to address them. She starts by examining the risks associated with fixed expenses, particularly when those expenses don't align with the practice's revenue generation capacity. She cites examples of practitioners such as Sheila, whose high rent on a spacious office space created significant financial hurdles, leading to immense pressure to triple the practitioner team and maximize session bookings. Herres highlights the wisdom of renegotiating the rental agreement or subleasing parts of the location to mitigate this bottleneck. The author also addresses the issue of unmanaged personal costs, emphasizing the importance of separating finances for business and individual purposes. Herres urges practice owners to consistently move funds from their COMPENSATION account to their personal accounts or use payroll to ensure clear financial boundaries and prevent a drain on business resources. Herres examines the significant impact of unsustainable wages for clinicians, advocating for a thorough review of compensation models and rates to ensure the practice's profitability. She stresses the necessity of tough conversations with existing team members to adjust compensation structures and create a financially healthy win-win for both the practice and the clinicians. The author addresses the challenging issue of debt accumulation, stressing the importance of putting a 'debt freeze' in place—ceasing to accrue new debt while diligently tackling existing liabilities. Herres delves into the nuanced challenges associated with fast and aggressive growth, arguing that while expansion brings exciting opportunities, growing too quickly can quickly deplete cash reserves and leave the practice vulnerable to unexpected events. Finally, the author examines the dangers of "shiny object syndrome," where practice owners are constantly lured by appealing new software, coaching programs, conferences, or other enticing investment opportunities without properly evaluating their financial return, leading to unnecessary spending and potentially distracting from more critical areas within the business.

Practical Tips

• Experiment with a 'flexible expense month' where you convert some fixed costs into variable ones. For one month, replace any fixed expenses with variable alternatives and track the impact on your budget. For example, instead of a fixed monthly public transportation pass, use a pay-as-you-go option and compare the costs. This can help you understand which fixed expenses are unnecessarily high when your usage varies.
• Utilize online platforms to list unused office space for short-term rentals. If you have extra space or unused time slots in your rental property, list them on platforms that cater to freelancers or small businesses looking for temporary workspaces. This can turn your idle space into a revenue stream and help offset your rental costs.
• Use a dedicated expense tracking app for your business transactions to keep them separate from personal spending. By setting up separate accounts within the app, you can categorize expenses accurately and generate reports that reflect only your business finances. This helps you monitor cash flow and identify tax-deductible expenses without sifting through personal transactions.
• Implement a "cooling-off" period for any non-scheduled transfers from your business to personal accounts. If you find yourself needing to move money outside of the regular payroll times, wait 24-48 hours before doing so. During this time, evaluate the necessity of the transfer and consider alternative solutions. This pause helps maintain financial discipline and respect for the established boundaries.
• Explore the use of telemedicine or other technology-based solutions to reduce the workload on clinicians. By allowing them to handle certain appointments or follow-ups online, you can increase their efficiency, potentially enabling you to offer better wages without sacrificing profitability.
• Use a budgeting app with a feature to compare your income growth to inflation and cost of living changes. Regularly input your earnings and track them against economic indicators to ensure your compensation keeps pace with expenses. If it doesn't, this could be a signal to negotiate your salary or seek additional income streams.
• Develop a compensation simulation tool using free spreadsheet software to visualize the impact of different compensation structures. By inputting various performance metrics and potential bonus schemes, you can create scenarios that show how changes in compensation might affect both individual employees and the team as a whole. This allows for transparent discussions with team members about compensation changes and helps them understand the rationale behind different pay structures.
• Create a visual debt tracker to monitor your progress and stay motivated. Use a large poster or whiteboard to list all your debts with the amounts and interest rates. As you pay off each debt, color in a section or mark it off. This visual representation of your debt reduction can provide a clear and immediate sense of achievement, encouraging you to continue.
• Implement a "Cash Reserve Challenge" where you set a goal to increase your emergency fund by a certain percentage before pursuing any significant growth steps. Decide on a realistic percentage increase, such as 5% or 10%, and then identify ways to cut back on non-essential expenses or increase income to meet this goal. For instance, if you run a small online store, you might temporarily increase your marketing efforts to boost sales or decide to postpone upgrading your website until you've met your cash reserve target.
• Develop a "Distraction Ledger" to log potential investments and distractions as they arise. Whenever a new opportunity presents itself, write it down in this ledger along with potential pros and cons, and how it aligns with your business goals. Set a review date for each entry, giving yourself time to focus on your critical business areas before revisiting the opportunity. This practice will help you avoid impulsive decisions and ensure that new investments don't derail your focus from core business functions.