E724 | A Simple Business Finance Set Up

In this episode of the podcast, Doc Danny discusses the importance of proper financial management for cash-based or hybrid physical therapy practices. He shares his own experiences with tracking finances in the past and highlights the flaws in his previous approach. By comparing the balance in his business bank account on a monthly basis, he overlooked important variables such as delayed payments and expenses.

Doc Danny outlines a more effective system for managing practice finances, which involves having regular financial meetings to review expenses, income, liabilities, and personal finances. He emphasizes the need for business owners to be proactive and disciplined in their financial management to ensure the long-term financial health of the practice.

One of the biggest challenges for new business owners is managing taxes, and Doc Danny recommends a simplified 4-account system to address this issue. By separating business and personal finances, setting aside funds for taxes, and automating transfers between accounts, business owners can reduce stress and ensure financial stability.

Overall, Doc Danny provides practical advice for physical therapy practice owners to improve their financial management skills and create a solid foundation for success. Tune in to learn more about the importance of proper financial management in your practice.

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Danny: Hey, real quick, if you're serious about starting or growing your cash based practice, I want to formally invite you to go to Facebook and join our PT entrepreneurs Facebook group. This is a group of over 6, 000 providers all over the country. And it's a pretty amazing place to start to get involved in the conversation.

Hope to see you there soon. Hey, are you a physical therapist looking to leverage your skill set in a way that helps you create time and financial freedom for yourself and your family? If so, you're in the right spot. My name is Danny Matta, and over the last 15 years, I've done pretty much everything you can in the profession.

I've been a staff PT, I've been an active duty military officer physical therapist, I've started my own cash practice, I've sold that cash practice. And today my company physical therapy business helped over a thousand clinicians start growing scale their own cash practices So if this sounds like something you want to do listen up because i'm here to help you What's going on?

Dr. Danny here with the pt entrepreneur podcast and today we're digging into a little bit of business finance some specifics about How do you go about paying yourself paying your staff? And what is a? Simple, but effective way of setting up your business systems from the financial side to run a cash or hybrid practice.

And I'm going to primarily speak to cash practices. The main difference being with hybrid practices, you may have some accounts receivable from insurance that you're basically, you're waiting on them to pay you for services that you've already completed. So I'm not gonna get into that too much.

That's really more of an accounting specific way of looking at finance. In this term, we're gonna talk about a general sort of structure that you can put in place that's really going to help you stay organized and on top of your finances. This will apply whether you have a hybrid or a this is straight cash practice.

So let me tell you a little story about how I used to track my finances. And some of you might be doing this as well. And I'm going to tell you why it's just a bad idea. To do this going forward. So when I first started my practice, the way that I would see how I was doing on a monthly basis is I would look at my bank account on the same date, basically each month, so I would look at.

If it was let's call it May. So I would look at May 1st and I would compare it to April 1st. And if I had more money in our business account, May 1st and April 1st, I was doing great. Like things were awesome. That means that I had made money. If I had less money in my business account.

On may 1st and april 1st, that means I had lost money And that wasn't good and As I look back on that and think about it. There's a lot of variables that are associated with what basically I was looking at was cash flow But comparing it what I thought was the same day, even though there can be some significant differences in Monthly finances, sometimes month expenses the timing of different things that are coming out or not.

Like you could have an inflated bank account when you have maybe a delayed payment of something like a credit card bill but it'd make your bank account look like you have. More money in it than you actually do because you actually have a liability on a credit card so It's a terrible way of going about that if any of you are doing that I'm going to give you a better option right of What you can do and how you can structure this and how you can pay yourself And the first thing that I would say and this sort of overlays all this is to make sure that you're having at a minimum A monthly financial meeting oftentimes.

It's very beneficial to set up a weekly meeting where it's a meeting with yourself so it's a it's just a table for one It's just you looking at your finances on a weekly standpoint at least and probably monthly as well And what you want to look at is your expenses. So what did you pay for?

Usually the best thing to do is to put all this on a credit card and you may have some things that go through your account automatically, or you pay rent obviously through like your business account. But if you can put almost everything on a credit card, it can be really helpful because you'll have one place where you can see exactly what everything what you spent money on and how much it was total.

So you can see, okay, what I spend money on my card. And if you're doing this on a weekly basis, You're going to pay that card off, right? So you're going to see, all right, what I spend money on, what don't need to spend money on, it's a great way to have a check and balance of what you're paying on that weekly basis, you're going to pay it off.

You're going to look at your business. So the income that came in that month. So how many patients you had, how much revenue you generated. All that your credit card, which would be a liability. And then you're going to look at things that you're going to potentially have to take care of that might be checks you have to pay.

It might be, looking at insurance that might be coming up, all the things that you're going to actually have to pay on a monthly basis. You're going to check in on that on a weekly basis and just see where you're at. So you get a better idea of. Is both what's coming in and what's going out and whatever you track, you're going to manage much better.

So very simple meeting doesn't take very long. And I usually would also look at the next week. So I'd forecast for it. Okay. What's the volume look like in the practice next week and get an idea of what that might look like for the next week and on the monthly basis, I would look back and just want to see, Both on the business side, how did the business do?

But then also I look at like personal stuff every single month where I just want to see what my personal finances look like. And that's a metric that leads to what we consider net worth. So basically what are all your assets? What are all your liabilities? And if you take your assets and subtract your liabilities, it gives you generally your net worth.

Which is just either it could be positive or negative depends on how much debt you have or how much income you have or savings you have. Okay. But at least better to know and track it every single month. So on a monthly basis, that's something that I would do. But one of the problems that people run into is the complexity that comes around accounts and how to manage things and how to account for different things.

Because when you are running a business, it's not the same thing as working for somebody else. There's different variations of taxes. You're, they're much more hands off with you. Unless you're paying yourself a straight tax, Salary from like a payroll service, then you have to manage your own taxes.

You have to save money. You have to be fiscally responsible to save money for taxes. This is actually a huge problem for new business owners. They don't actually put money aside for taxes and then they spend that money. Or maybe they invest that money and then they can't get it out for some reason, like maybe they put it into some sort of deferred tax account, like a IRA or something, and now they're, In trouble because they have a tax payment due that they didn't actually settle up and they didn't realize how much it would be And then now they have to come up with that cash to pay for their taxes Which are incurred on the income that they've earned, right?

So how do you go about managing all this stuff? Because when you work for somebody else, it's so easy I remember whenever I was in the military, I still absolutely Rushed to do my own tax return Because I always got a refund. It was awesome. As soon as I could do a tax return, I would do it on like TurboTax or H& R Block or something like that.

I could just do it online. And then I would get like a 3, 000 tax return or whatever it was. And it was awesome. Cause then it was like, awesome. We're getting money back, and it always felt great. I want to get it done as fast as possible. Now when tax season rolls around, it's a pain in the ass.

Because. It's getting everything together. And even though I stay on top of it's still a pain in the ass because you have to coordinate with your CPA and all that, but it's just the cost of doing business as a business owner. It is what it is. So in order to stay organized, there's a couple different methodologies.

One that a lot of people that I know that are business owners to use is. An approach called profit first. So profit first is a book that was written by guys named Mike Michalowicz. And he's got a handful of books that he's written in the entrepreneurship world, but this one specifically is on setting up the finances for your business.

And it's a good, it's a really good book. A great book. There's some general sort of. Guidelines as to how to run a, how to run your business. I found the approach to be complex. You have to have five accounts and that's at a minimum. Sometimes it's like more than that, up to seven.

And I try to do it. I found it really complex and it was unable to stick to it. So what we started. Playing around with was can we get like a, what's the 80, 20 principle, right? What are the 80 percent of things I can I benefit I can get from 20 percent of the concepts in this book and what we decided to do was test whittling that down and making it a more simplified model.

That's what I do now. That's what we, did with our practice before we sold it. I'm assuming that's what they're still doing now. And this is what many of the people that we work with end up doing as well. And this is what we would consider more of a simplified version of that, that really fits more of these these cash based practices, which are very simple businesses to run.

Like we don't really have, we don't have a lot of. Inventory or we're not having delayed payments and credit cycles. And I have a friend that has a fairly large, like juice company. She sells like they have retail stores, but they sell to Costco and Publix and Kroger and whole foods.

And her business is so complex because just buy fruit and she sells retail, she sells wholesale. She has trucks that have to go out and they have to manage all the logistics of that, and then. They have contracts with certain stores where if the product isn't bought, then they have to buy it back from them.

If they're like trying to get into new stores, it's, it sounds like a nightmare, right? So for her, like running the finances of all that is. It's a full time job, at least for one person, obviously, probably more on her finance team, but for a cash based practice, it's fairly straightforward. And there are really four accounts I would say that you need one of those being your personal account, right?

So I don't lump that into a business account, but that's the fourth account, but really there's three main ones. So you've got your personal account, you've got a profit account, you have a tax account, and then you have your business account. So that business account, think of that as like the main account that everything is getting funneled into.

So anytime somebody comes in and they pay for a visit, it's going to go into your business business account, right? So all, everything goes into that. And this is also where I like to keep cash on hand, at least a portion of that. So one of the recommendations that we typically have is to have three months of business cash on hand.

And that's honestly, just so that you don't You don't get yourself in a bad spot where you run out of cash. So three months is a fairly conservative amount. Some people would recommend less. Some people more depends on the business, depends on the stability of the revenue. So if there's a lot of recurring revenue, maybe you could have less.

If there's not so much, you're going to want to have more. I like three months for businesses like this because it's very stable. It makes you feel better. I call it like. Sleep while at night kind of insurance almost for your business. And that's money that you can keep in that account. If you, if it gets really big, you can move it over to like a high yield savings account if you want to do that, but you just leave it in that one account, right?

But just know what that number is, because you're going to use that as a threshold that everything above that you're going to sweep into these other accounts. So let's say I have. 20, 000 as a cash reserve and I get 20, 000 of net income that comes in during the month. So I'm sitting at 40, 000.

You're going to take a percentage of that move to profit a percentage of you're going to move to tax and then a percentage you're going to move to business expenses, right? Or or to I'm sorry, your salary your business income. So you're going to move it over. And that's basically what you're gonna pay yourself.

Hey, sorry to interrupt the podcast. I have a huge favor to ask of you. If you are a longtime listener or a new listener and you're finding value in this podcast, please head over to iTunes or Spotify or wherever you listen to the podcast and please leave a rating and review. This is actually very helpful for us to get this podcast in front of more clinicians and really help them develop time and financial freedom.

So you would do that. I'll greatly appreciate it. Now back to the podcast, aside from the fact that you're going to use, maybe some of the things from the business are slash personal stuff, like your credit card, or maybe you have a vehicle that you're paying gas with or whatever. You can always kind of count that towards personal income, but that really goes into business expenses.

You'd have to add that back. So let's say you're paying yourself a salary and that gets, it's going to swept out into your personal account. You've got profit that you want to set aside for, the profitability of the business that you can pay yourself either on a monthly or quarterly or annual basis, however you might want to do that.

And you have taxes. And what's nice about this in particular, the tax account, I think it's the most important one. If you have, let's say 20, 000 of net income from the month that came in, but you have. Let's call it forty thousand dollars of income that came in gross revenue So that's how much you made but at the end of the month you had twenty thousand dollars of net You're actually going to want to take twenty percent of what the business made that month In gross revenue and put that into the tax account So if you're sitting at forty thousand dollars it came in and net you're at twenty thousand dollars in net You have to take twenty percent of the gross income, which would be forty thousand.

So you would take 20 percent of 40, 000, which is 8, 000. And you'd slide it over to the tax account and don't touch it, move it over there and don't touch it. And when you have quarterly tax payments that come up, you can pay it out of that account. It's just that simple. Imagine it's not your money.

Imagine it's literally, you're just imagine you're paying the IRS that money the day of. But instead of doing a day of use, have to have quarterly payments that are made, the quarterly basis so that you can settle up with estimated taxes. And it may be above or below that. These are estimated and that's the way it goes.

They base them off the prior year, but it is what it is. You got to pay him either way. And you can settle up once you get your tax return in, but just setting that money aside in a tax account is really important. It's 20 percent of revenue that comes in during that month, gross revenue.

And that might be a little high. It depends. It depends on the business. It depends on how much expense they have and you can move this up or down. Most people don't have to move it up. 20 percent is a little bit. On the high end, but in my experience, I would rather people put more money away for taxes.

And then when you find out, Oh, I didn't need to settle up that much. You basically have an additional profit account that develops from that. Usually we overfund it and then that turns into an additional profit account. And then you can take it and you can put it into whatever else you want from there.

You can take it personally, you can reinvest in the business if you want to do that. I really prefer use it, go have fun with that, right? Enjoy the business successes. You have the profit account. This usually is a small percentage and that might be five to 10 percent of business income that comes in because that's going to be at least a good habit.

You're developing of trying to generate profit that you're not touching, except for when you pay yourself these distributions in profit, but I would prefer a lower profit account. And more money that goes into your salary. So like you're adding stability to your life through income.

You're generating from the business on a monthly basis that then you can use in your personal life and your own personal budget, your own personal financial strategy versus having these sort of big pops of revenue from a big profit account that might be hard for you to manage versus wanting more stability on a monthly basis.

That's at least what I prefer. If we look at these accounts again, you're going to have a central business account. That's going to be a holding account. That's going to have, I think of it like a certain threshold of reserves. You're going to keep in there unless it gets like really big and you take some of it out and put it into a high yield savings account.

That's going to get you 5 percent on that money. And that's great because that's passive revenue. You can generate off of cash reserves. You need to have for the business for really for the purpose of stability in general. So that's where the money comes in. That's your central account, right? And just think.

Off of that, you have these little branches. One's going to go to taxes. You're going to put about 20 percent of what the top line gross revenue. So how much money you made not net but gross on a monthly basis. You're going to move over to taxes. Don't touch it. Profit, like I said, community between five and 10%.

It can be as low as zero. If you're going through a growth phase or there's just not a lot of profitability in the business as you're getting started or as you're hitting different scale phases let's say you're going to move into a standalone space and or you're moving from a standalone space to a bigger one, you may have a period of time where you have all these additional expenses you incur.

Profit account goes basically to zero and then you can build it back up as you stabilize your revenue So that one I feel like you can really fluctuate up and down as much as you feel comfortable But I want your salary to stay basically the same, right? So what you pay yourself to your personal account, which is the last and fourth account, which is outside your business accounts That's going to be your salary account and you want to try to create Stability for yourself and as an entrepreneur you're going to get pretty You Like used to variance in what you make but it's sketchy.

And one of the nice things about a paycheck and one of the reasons why a lot of people don't leave working for anybody else is because of what we call paycheck paralysis. They don't want to lose that consistent paycheck. They know is going to come in. It's what they budget their life off of. So you can create stability for yourself.

You can basically say, Hey, okay, I need to replace 7, 000 a month in income. I'm going to pay myself. Okay. 7, 000 a month, and I'm going to make it consistent across the board by, transferring that amount of money over. And maybe that means you have less profit account, but you have more stability in your own salary.

I'm fine with that. But as the business grows, you're going to get a chance to keep your salary the same, but move more money over to the profit account, which is a sneaky way of increasing your savings rate as well. And again taxes we all got to pay it is one of those things it is what it is, right? It's you pay it personally you pay it if you're a business owner so move money to the side and make sure you're allocating taxes because I can't tell you how many people i've talked to you That have been blindsided by a tax bill that they didn't think was coming because They didn't understand how much money they owed and they didn't have like good communication with their CPA about what that would be.

And they maybe weren't able to run their own sort of projections on a, an estimated basis of what they're going to pay. And the next thing they're having to come up with, tens of thousands of dollars sometimes. And that's a really stressful thing to have to do that. So make sure you're sliding that money to the side.

And instead of having five to seven accounts, now you can narrow it down to four. Main business account, a profit account, a tax account. All those are simple business checking accounts. And then you have your personal account, which sits outside of it. And this is a way more simplified way of running it, where you don't have to necessarily have all these different accounts.

You're moving money around or whatever else. Try to save you from percentages. It's very simple. Simple. The last thing you can layer on top of this is a payroll provider, which you can do yourself in most cases, like it's really not that hard until your business gets like really big and complex.

And you can outsource that to like your CPA or accounting group. But a payroll service like a gusto is a good example of one that a lot of people use very simple, but it really helps with. With making sure that your taxes are being taken out effectively, for payroll taxes for the state federal for your salary what you're paying yourself goes through a payroll processor And and that's a really easy way to make sure that is managed as well And if you do that way, then you're basically going to take the money from your business account that you pay yourself as your salary to your actual personal account And you basically just run it through the payroll processor and it gets added to your account as if it's like an employer doing that, which it is, you're the employer, you're just paying yourself through that.

So that's it. I hope this helps. I hope this is something that is simplifies this for you a little bit. It's very complex. I think that this is the area that most business owners that are clinicians struggle with. This is not something that we learn in school. This is not something that many of us feel comfortable with.

And in fact, some of you might get a lot of stress when it comes to finances. Both personally and business and I can tell you what i've seen with people that feel very stressed out Over looking at business finances or personal finances or if they're just in a bad financial position in general let's say you have like debt is avoidance honestly Avoid it.

Don't talk about it. Don't look at it act like there's not a problem Especially if it creates stress with you and your partner your business partner or life partner spouse, whatever like You avoiding it doesn't make it go away You know it's still there. It's not it's not like the problem goes away.

So instead of avoiding it, try to gain some clarity on what is happening in your personal finances and in your business finances. I know that's like really frustrating and a difficult process to go through, but if you don't know what your monthly. Expenses are if you don't know what your business is making and what the expenses in the business are How can you expect to have predictability over what you're going to do with that?

With that money to support your life to make sure you're moving towards the financial goals that You have to do it. You have to do it and it is very helpful If you have a spouse, maybe that's, it's very apprehensive to it. That's fine. Just take the lead on it and share relevant information with them to fill them in.

They don't have to sit down with you and look at your personal expenses every month, but at least fill them in. If it's a business partner, definitely sit down with them and make sure you're going through everything and holding each other accountable about what these expenses are. Are they necessary?

They're not necessary. That right there will put you ahead of most people. And if you are struggling a bit on the personal side, which is regardless, like you can have the most. Profitable business in the world. But if you suck at managing money on the personal side, it doesn't really matter how much you make.

I really like a service called Monarch Monarch finance, I think is what it's called. And I use it to look at monthly personal expenses every single month. It's once you set it up and you categorize things, it's. Pretty damn automated and it does a really good job of showing you recurring things, percentages of where you're spending money on.

Like last month I had to get a bunch of work done on my truck and I had to get new tires. And if you look at our expenses, it's oh wow, we had a ton of automotive expenses. That month, but if you look at it over the course of a year, it's relatively not significant It's it's basically what it would normally be.

It just isn't that one month, right? So instead of me and my spouse fighting about like why are expenses high this month? We know oh it's because I had to replace my tires or whatever, right? You know There's something specific that you can point to and it really decreases the stress when it comes to conversations about money on the personal side because and that's where it's all going to end up no matter what so you got to get that You In check as well, and that's monarch finance.

I believe is the name of it. Really helpful something I use every single month So in summary simplify your business Accounts the way that you're allocating money Make sure you have a central account where everything is coming in If you take nothing else away from what I just said make sure you pay Your taxes to a tax account that you don't touch.

Then you end up with 20 percent of what's coming in, moved over to a tax account. And that's there to be able to pay the tax man when the time is due, not your money, the government's money. Don't even look at it. That's going to save you a ton of stress in general. So hopefully this helps. I know this is an area.

It's complex, hard to explain without like visuals, but hopefully this helps you better understand how to set up your business accounts. And if this sounds like, dude, I suck at this, I need a lot of help with this, I know this is a big problem for me. You should honestly jump on a call with one of our advisors.

We have our own internal system for how we teach. Finance for cash and higher practices called the clinical cashflow system. It's something that we run our clients through in PT biz, and it makes a massive difference with people getting on the same page of how they're supposed to manage all this stuff and actually have, a system to follow and a mentor that can actually help them make sure they're allocating things correctly financially.

You have to do it. You have to implement it. You have to do the work. Obviously he's anything, but like to understand what to do and how to set things up and how to pay yourself correctly. It can take so much stress off of you as a business owner instead of you just trying to figure it out all by yourself.

Either way. Thanks so much for listening. I really appreciate it. And I'll catch you in the next episode.

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