E627 | Understanding Business Cash Flow

In this podcast episode, we explore the fundamentals of cash flow management, a crucial concept for aspiring entrepreneurs who may have a different financial background. Danny breaks down the difference between revenue earned and revenue completed, shedding light on how these figures can impact your business finances.

While revenue earned reflects the money collected within a given month, revenue completed represents the value of work completed during that period. Understanding this distinction is vital, as it reminds us that we haven't yet fully earned the amount reflected in our revenue completed.

To ensure financial stability, Danny advises maintaining a conservative approach to cash flow. They recommend setting aside 3-6 months' worth of cash as a safety net, cautioning against paying yourself too much until this cushion is established. Having cash on hand serves several purposes, including covering refunds, weathering seasonal downturns, and adapting to unforeseen events like the recent COVID-19 pandemic.

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Podcast Transcript

Danny: Hey, real quick before we get started, head over to Facebook and join the PT entrepreneurs Facebook group. If you haven't done so yet, we have monthly live trainings going on there. There's an opportunity for you to join in the conversation instead of just listening to what I have to say on this podcast, as well as the people that I bring on.

And it's a really cool place to join about 6, 000 other clinicians that are. Honestly, trying to change the landscape of our profession through these cash and hybrid practices. One other thing that's really cool is we have a guide in there. That's a quick start guide. When you join, you can go and check this out.

There's about seven videos that we've curated that are the most common questions we get in the best case studies that we've found to really help you start, grow, and scale your practice up to seven figures. So if you haven't done so yet, head to Facebook request to join the PT entrepreneurs, Facebook group.

You have to be a clinician. We're going to check you out. We don't just let anybody in. But if you are head there, go ahead, get signed up. We'd love to have a conversation with you in that group.

So here's the question. How do physical therapists like us who don't want to see 30 patients a day, who don't want to 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 is Danny Matei and welcome to the PT entrepreneur podcast.

What's going on. Dr. Annie here with the PT Entrepreneur Podcast and today I'm going to be going over the basics of cash flow management and this is something that I think I probably spend the most amount of time working with our newer business owners on and just being able to understand what that means and how it applies to your business is is a huge.

area that most entrepreneurs, new entrepreneurs really need to spend some time to understand. Cause it may not quite be the same as like personal finance and things that maybe you're used to. And if you are listening to this and you want to watch the video version of it, head to YouTube. We'll have it up over there on the PT Biz channel cause I am going to share my screen and I'm going to go through just some basics of terminology as well as some examples of what cashflow management is and and why you need to understand that.

So let me share my screen real quick. I All right. So when we look at cashflow management, the basics of cashflow management, what we really want to see is that you understand a few things. Number one, when we look at cashflow management, we have to understand the difference between revenue earned. And revenue completed.

Now, this is really important because if you are working in a model where you are selling a plan of care upfront, which would mean that you are, taking advanced payment essentially for the the services you're going to render. This is something that we typically recommend people do for a couple of reasons.

Number one, it gets that person to commit to actually. Solving a problem. Most people are going to have chronic problems are trying to work through. This is a great way to force accountability with that person and to make sure that you can build out a a plan of care that's going to get them the result that they want.

It also improves your cash flow in the business. So you get that cash in the account ahead of time and you get to chip away at, working it off over the course of that plan of care. But this is the money that you actually collected each month. So let's say. So you saw 10 people and everybody that you saw paid you for a 10 visit package of visits, which in this case, let's just say it's 2, 000.

So that would be revenue earned would be two or 20, 000 in this situation. So 10 people paying you 2, 000 each. Then you have revenue earned 20, 000. Now, if we look at revenue completed, let's say that your average visit rate is 200 a visit in this situation where that's what a 10 visit package would be at 2, 000.

And let's say that you saw 40 visits during that week. Or during that month. So you saw 40 visits during that month. That means that you actually completed, revenue completed. 40 visits at 200 each. So that's 8, 000. So you might have brought in 20, 000, but you only actually completed 8, 000 worth of work.

Okay? It's very important to keep in mind, because the difference there is 12, 000 that if you don't understand how to manage your cash flow, you might just distribute that to yourself and go and get yourself a nice car. Or go on a super cool vacation. And not actually keep enough cash on hand to...

Bolster the business and make sure the business is in a healthy place. And also understand that you actually haven't earned that money yet. Like that's really important to keep in mind. You haven't earned that money yet. You might have earned revenue, but you haven't completed revenue. So there's the gap there that a lot of people misunderstand them.

They get they get stuck thinking like, Oh, I can pay myself a lot more than I should. And then if something happens negatively in the business, they're in a really bad spot. So when we look at the last thing that you really underneath it, need to understand with this is cash on hand.

So your cash on hand is how much do you have in the actual account? It's a pretty simple number. How much is in your operating account? And what we like to see people have is three to six months of cash on hand so that they can have a great cushion for the business. And there's a few reasons why.

So in, in a really simple example, right? So if we look at a couple of reasons why one would be a refund. Let's say in that same example, you got ten people come in, they paid you two grand a piece, so you got 20, 000 in earned revenue, and you only completed 8, 000 in revenue. Now, let's say you took that additional money, that extra money, and you're like, man, sweet, I'm going to go on a 10, 000 vacation, awesome, I'm going to just blow a bunch of money on a vacation because it's there, I can use it I've earned it.

And then you have somebody that comes back in after two visits and they're like, this isn't working, I want a refund. Two visits, you gotta give them 1600 bucks back if they paid you 2000 for ten. So now you gotta refund eight visits. All of a sudden you gotta come up with 1600 bucks and if you're not doing a good job of managing that cash and understanding that you haven't earned all that cash yet, You're going to be in a bad spot, so you can't look at the number in your account and say, Oh, that's mine just yet.

Cause you also haven't even accounted for taxes. So all these other things that you have to keep in mind, you have to be very, just conservative with your cashflow, especially when you're just getting started. Cause you're such a unstable. Part of the business is the most risky portion of the business where, you can definitely go out of business if you mishandle this stuff.

The other thing is seasonal downturns. We see this every year at Christmas, every year at Christmas or in December, I should say really between Thanksgiving and the end of the year in a cash setting. In particular, if you're an in network practice. That time is when everybody's trying to squeeze in business because they've met their deductible and it's about to roll over.

You may be really busy during that time. But if you are in a cash practice, you're going to be not busy at all, right? You're going to be really trying to find clients as best you can because they're all on vacation. They're all traveling. They're all they're tied up with all kinds of holiday things.

Their kids are out of school. It's going to be one of the slower times of the season or of the year. So you got to know that and going into that, you got to have cash reserves to be able to bolster the lack of money that's going to be coming in. And yet you might still be working off visits that people have already prepaid.

So you've got to have cash on hand for seasonal downturns. The other thing is unforeseen events. How about COVID? This is a great example. When we had to shut our practice down, it was scary and it was something that we didn't really know what to do. And the fact that we are ultra conservative and typically would keep six months of cash on hand allowed us to have conversations with our staff and say, Hey, you guys don't worry about, trying to find anything else to do.

I know we don't have anything we can do right now, at least for the foreseeable future. We don't really know what this looks like, but we're not gonna let anybody go. You got your job. They're safe. We're going to pay you guys and we could do that because we had cash on hand. We had a good cash flow management.

So when you're just getting going, here's the best advice I have for most people. It is to pay yourself as little as you possibly can afford until you're at least at three months of cash on hand or cash on hand for your overhead. And this is how you calculate that. Let's say you have 5, 000 in overhead, right?

And this is what I would consider like your salary as part of that as well. So you have 2, 000 for everything else overhead for your rent and technology and all that stuff. And you have 3, 000 that you want to pay yourself, which is going to be the least you can possibly pay yourself and barely get by.

All right. So your overhead is going to be five grand. So you want to build your cash reserves up to 15, 000 before you really start paying yourself a slightly better. Salary, right? Let's say you want to bump that up to five thousand dollars a month. Now all of a sudden that changes You're monthly expenses, right?

So you went from having 5, 000 a month in overhead to now you have seven because you're paying yourself five and the rest of your overhead is two. Seven times three is 21 so now you got to get that to 21, 000 and this is where it continues to, you have to continue to chase this because it's not just a set number.

It's based on your overhead. You go to bring another employee on or you move to a standalone space. Now all of a sudden you might be having 20, 000 a month in overhead and you need 60, 000 of cash on hand, which sounds like a ton of money, right? But I. I promise you, you can burn through that really fast based on some of these fluctuations that happen in a business.

So hopefully that makes sense. Hopefully the, the actual like examples of what I'm talking about, help you better understand this. But I think that if you can really conceptualize the difference between the revenue that you've earned the work you've earned.

And the work you've completed, those are two different things. And you have to respect the fact that you haven't actually earned that revenue just yet until you've worked that off by actually seeing those visits. The other thing is to understand that you have to have a buffer there that cash needs to be there because it's a safety net.

And if you use it all or you pay yourself all of it and you go and you do fun shit with it, that's awesome in the short term, but you're putting yourself at a really in a really challenging spot if you have fluctuations in the business or if something unforeseen happens, which does. It's and you also don't know it's coming.

You don't you can't predict it. That's why it's called unforeseen and you don't know what's going on. So this is a very long game. We're in this to be in this for as long as you possibly can. So you don't want to make short term decisions based on the things that you want. In the short term when you can definitely have those things in the long term once you set yourself up to be in a better Financial position with your business and your business will be a hell of a lot more bulletproof because of it So hopefully this makes sense cash flow management I hope this helps you take a look at your account on a weekly basis If you're not doing that guys and girls like please don't hide from your numbers Even if they're bad take a look at your finances every single week understand where you're at positively.

Negatively. It's really important. The other thing, and this would be something that I would really appreciate is we're trying to get this information from as many people as we can, and one of the best ways we can do that is actually through ratings and reviews of the podcast, both on iTunes and on Spotify and just letting us know if you like it or whatever feedback and and rate it in.

And the other thing is to share that. So if this is something that you think is beneficial for. Other people that are friends of yours or people that you know, send it their way, take a screenshot of it, put it up on Instagram and let them know that you found something helpful. Some people check it out if you think that they could benefit from it.

It really helps us get this into the, ears of more people for the eyes of more people if they're seeing it on YouTube. And we want to help as many clinicians as we can. So if you like what you're hearing, if you like the stuff we're putting out, please leave us a rating and review. And or share this on your social media channels.

We greatly appreciate it. And as always, thank you so much. And I will catch you guys next week.

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