E553 | Cash Reserves Are King

Welcome back to another tactical Thursday episode! If you get into a business for yourself and you don't have a strong understanding of finance, you can put yourself in a very poor position. Not having cash reserves is something that will lead to being in that poor position. I dive into this topic today. Enjoy!

• The importance of understanding business finance
• Understanding how much you need to project for taxes
• Dealing with unforeseen events like Covid Pandemic

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Podcast Transcript

Danny: So one of the best ways to improve your customer experience, which we know will dramatically improve your business, is to have clear lines of communication with your clients. And that's something that can be really hard with these multiple channels between email and text. And what you really need is to centralize that in one place.

And that's something that we've been able to do as we switched over to PT everywhere within our client's accounts. We can actually message right back and forth with them. They can manage their home exercise plan within there, and it allows us to really compartmentalize the communication. That we have with those clients, instead of losing an email in the inbox or missing a text and then you're, it's very hard to dig yourself outta that hole because they feel like you're not very responsive, with them.

And for us, it's made a really big difference. It helps make our staff more efficient. It helps us not miss things as much with the volume of people that we're working with. And it's a really smart way of really compartmentalizing your communication with your clients so it doesn't interfere with the rest of the channels.

You have communication with family and friends and things like that. So I think it'd be. Huge for your practice to centralize it the way we have. Head over to pt everywhere.com. Check out what our friends are doing over there. I think it's really cool and I think you really like it. So here's the question.

How do physical therapists like us who don't wanna see 30 patients a day, who don't wanna work home health and have real student loans create a career and life for ourselves that we've always dreamed about? This is the question, and this podcast is the answer. My name's Danny Mate, and welcome to the PT Entrepreneur Podcast.

What's going on guys? Dr. Danny here. We're a PT entrepreneur podcast, and today we got a short tactical podcast for you. This one is all about cash reserves and finance. Now, one thing that over the last 10 years I have really started to dive more into is finance, business finance just numbers in general in relation to business and personal finance.

It's something that. I feel if you don't understand and you get involved in starting your own business, you are really putting yourself in a really poor position because it's like buying a car and not knowing how to drive it. It, and it's boring. It's not the most fun thing in the world.

Some people like it, but those people are typically called accountants or chief financial officers. Like they're, they go into finance, they don't go into the clinical space. We like to work with people. That have back pain or shoulder issues or, different sport specific niches.

And we don't intentionally typically start wanting to go into a business. So this is a secondary thing that we have to we have to understand. And one core concept that we talk a lot about within our mastermind in particular for businesses is the idea of trying to get to and maintain. At least three months of cash reserves in your business.

So this benchmark is really important for a number of reasons, but three months of cash reserves basically is equivalent to your overhead each month. So your overhead is all the things you're having to pay for your rent, any of the utilities you have the tech stack you use to run your your business and even your own salary and your employees salaries are gonna be involved in that as well as their payroll taxes, right?

So basically what you have to pay every month in order to. Get your business to be running and continue to run. So let's say that number is $10,000. That means that at a minimum, you want to have $30,000 in an operating account, that the business is like accepting cash into that into that account.

So it's flowing in and out of it. But your cash flow is basically how much money's coming in, how much money's going out. You either have a net positive, meaning that you were profitable or you have a net negative, which means you weren't profitable for. That month. And as we look at this is an important understanding to have because you do want to know if you're making money or not, and you wanna know the decisions that you have to make that lead to maybe using some of that money.

And what's the probability of success associated with investing that money into the business or reinvest that money into business. So I'm gonna give you a couple examples. Of why you're gonna want this three month buffer. And really it's between three and six now. Six might be if you're over like super, super conservative or you feel like maybe you're gonna go through a growth cycle or something.

Three is at a minimum where you want people to be. But man, you sleep a lot better at night when you have cash reserves in your business because it can fluctuate, wily here's a few reasons why you're gonna wanna do this. Number one, they're seasonal fluctuations. So those of you that have a practice that is a cash-based practice, you'll notice that towards the end of the year, November and December is some of the slower months especially after Thanksgiving.

I would say the last five, sort of six weeks of the year. Those are probably the slowest months that we see in a cash-based practice. Unless you are in a area where there's like seasonal transition where people are coming in. For the winter, right? So you might be in a snowbird area where you're actually busier in that timeframe, no matter whether you're in network or not.

Now, in network practices, typically the end of the year, they're the busiest because people are trying to like cram, visits in and cuz they've met their deductible. So it's different if you have a cash-based practice, it's not gonna be. The case necessarily, unless they've met their deductible and they get really good out-of-network benefits, then they might do that.

But in most cases, the end of the year's gonna be a little bit slower. So it's really nice to have cash reserves to be able to buffer that because we also know that q1, so January, February, March is one of the busiest quarters, so one of the best quarters from a profitability standpoint. So if you have that cash reserve going into the holiday season, you get a chance to enjoy the holidays instead of freaking out and think you're going outta business because you have cash reserves that draw down a little bit and then they go back up as you go into quarter one.

So you can't really look at the snapshot, a monthly snapshot you can look at, but you really have to look at your cash flow over a longer period of time because that gives you a much better idea, truly how your business is doing. Number two, You might be going into a hiring or an expanding phase.

So we call these growth cycles. And growth cycles are painful in a lot of ways because you have to put so much more work in to build like a bigger space to hire people, to build your team, to become a better leader. There's a lot of stuff you have to do and growth cycles, require growing and there's growing pains associated with that.

One of the things that happens too is that we typically have a decrease in our net profit. As we do this because we're bringing on more expenses and as we're building our team we don't inherently start with immediate profitability, immediate, increase in revenue. You have to build into that.

So having cash reserves really helps you go through growth cycles and expansion phases in a much. Safer way in a much more low stress way, versus if you have zero money in the account and you're putting everything on credit cards, that sucks. That's really stressful versus having cash on hand.

The other big thing, and this is the third thing that I would say, is a big reason why you want to actually. Have cash reserves and it comes down to unknown expenses. These things pop up. You may have a big bill that you didn't expect, you may have like a medical, issue that pops up in your family that, having those cash reserves in the business you if need be, you can pull that into your personal finances as well.

Having that cash cushion can be really good. Before we started actually like really understanding how to allocate money for our business, I remember it was our. Our second year in business, which was right bef right as we're like going through our big growth phase to a standalone space. And I remember we were taking our kids down to Disney.

We were driving down there from Atlanta, and we're about halfway down there. And we're super excited, right? Because. This is the first time we've taken our kids to Disney and it's like we're excited to go on this trip. And I get a call from my CPA and he's Hey Danny, I got good news and bad news.

Good news is like you, you made more money than our projections were this year. Bad news is you have this big tax bill, right? So I had a $20,000 tax bill that I owed and. Like that sucks. That's a lot of money and it's an unexpected ex expense. Now, granted we made more money, but we hadn't really been projecting, like we just didn't really know how to project taxes at that time.

We didn't understand the concepts of it. Our c p A was very reactive. We don't use a C P A anymore. But at the time he was very reactive. And there wasn't a whole lot of tax planning and or proactive tax work that was occurring. So it ruined our trip to Disney. Like it sucked. I remember the next three hours were like, awful cuz I just was, I was thinking about is the money that we had to make up, which basically was gonna suck up the cash reserves that we did have.

And then we were back to, zero at that point. Having a cash reserve and understanding. That money is sitting there and yes, it can feel like it's dormant and you're probably, you're thinking to yourself like, oh man, I could be using this for so many other things, or investing this or whatever.

But you're not gonna lose that money. And that money is there as a safety net for your business. And as your business grows, your cash reserves grow too. Cuz if you think about it, if your overhead is $10,000, you need $30,000 in cash reserves. But if your overhead is $30,000, you need $90,000 in cash reserves at a minimum because.

Your overhead has increased three x. So you have what looks like a lot of money, but that money can really go away really fast if something bad happens. For instance, COVID is a great example. That was the scariest time of owning a business that I've ever experienced and having to shut a business down and seeing a complete drop off while still maintaining a staff without having any idea what's gonna happen in terms of like P loans or E I D L loans or anything.

That, could help your business get through. At the time we had six months of cash reserves on hand. Cause I was very conservative and still am with our businesses in terms of cash on hand. And I remember talking to our team and telling 'em like, you guys are good. We're not gonna have to let anybody go.

Don't worry about your job. We gotta focus on what we can do now in this time. Which, it was what we worked on and And luckily, for us, like that was something not luckily, like intentionally, we put ourself in a place where we had cash on hand. And it's very helpful, especially for things that you don't know that might occur.

And it's happened now to me, multiple occasions where we've had unknown expenses, unknown things that we had to fix or buy, or things that happen economically. And you're always in a better place if you have cash reserves. At a minimum, make sure you're building a three months of cash reserves.

You're not there yet. Start chipping away at it as if you're just, it's part of your savings. Like it should be a savings goal. How fast can you get to three months of cash reserves? And then from there, take a breath, and then you can start distributing money out to yourself as a, as part of your income, part of what you're paying yourself.

But build the foundation first. Build a safety net. And then start using that cash for other things that you want to do. So hope this helps Keep your cash reserves three months at a minimum. That's the standard that we want to see. It'll help you at the ton tremendously going forward in terms of hiring growth cycles and all the other things you have, but it's also gonna make us sleep a hell of a lot better at night.

So guys, as always, thanks for listening and I'll catch you next week.

Hey, peach entrepreneurs. We have big, exciting news, a new program that we just came out with That is our PT Biz part-time to full-time, five day challenge. Over the course of five days, we get you crystal clear on exactly how much money you need to replace by getting you. Ultra clear on how much you're actually spending.

We get you crystal clear on the number of people you're getting to see, and the average visit rate you're going to need to have in order to replace your income to be able to go full-time. We go through three different strategies that you can take to go from part-time to full-time, and you can pick the one that's the best for you based on your current situation.

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To take action if you're interested and sign up for this challenge is totally free. Head to physical therapy biz.com/challenge. Get signed up there. Please enjoy. We put a lot of energy into this. It's totally free. It's something I think is gonna help you tremendously, as long as you're willing to do the work.

If you're doing the work and you're getting. Information put down and getting yourself ready to take action in a very organized way, you will have success, which is what we want. So head to physical therapy biz.com/challenge and get signed up today. Hey, real quick before you go, I just wanna say thank you so much for listening to this podcast, and I would love it if you got involved in the conversation.

So this is a one one-way channel. I'd love to hear back from you. I'd love to get you. Into the group that we have formed on Facebook. Our PT Entrepreneurs Facebook group has about 4,000 clinicians in there that are literally changing the face of our profession. I'd love for you to join the conversation, get connect with other clinicians all over the country.

I do live trainings in there with Yves Gege every single week, and we share resources that we don't share anywhere else outside of that group.So if you're serious about being a PT entrepreneur, a clinical rainmaker, head to that group. Get signed up. Go to facebook.com/groups/ptentrepreneur, or go to Facebook and just search for PT Entrepreneur. And we're gonna be the only group that pops up under that.