Why Bookkeeping Alone Cannot Run A Therapy Practice

We explain why bookkeeping matters but still cannot tell you what to do today with the cash in your therapy practice. We lay out a behavior-based money management system using Profit First so profit becomes a habit and cash flow stops feeling like feast or famine. 

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*Intro/outro song credit:
King Around Here by Alex Grohl

Transcript

Why Accounting Is Not Enough

SPEAKER_00 0:00

Most practices have an accounting system of some kind, and it is really important to the business. However, what most people don't realize is that it isn't enough by itself. My name is Craig, and I'm the owner of Daisy Financial Coaching. Our team is on a mission to make your therapy practice permanently profitable. If you own a solo or group practice, we're here to help you build a business that creates more time, makes more money, and serves more people. This is the Therapy Business Podcast. Every business needs some way to track their spending, and an accounting system is there to do that. That's whether you're using QuickBooks or tracking your bank statements, maybe you have a spreadsheet somewhere, having some kind of way to look back and see how your business is financially doing is really, really important. Now, I highly recommend if you're not already, have a bookkeeping software, hire an accountant or a bookkeeper to do that to help make sure it is really locked in and accurate so that you can get profit-loss statements and balance sheets to look back and see how are my finances withstanding? How are we doing? So if you don't have that yet, that's going to be a huge necessary step. But to me, that's not the only thing a business needs. And in fact, I find that the thing that people are missing is infinitely more important. And that's a money management system. If you don't have either of these things, then I really recommend starting with a money management system. And that is the way you manage money on the day-to-day. How do we make real-time decisions? How do we keep track of the cash in the business? How do we make a decision for this week or this month? The thing with an accounting system, so having a QuickBooks or pulling your accounting sheets like a PL, like I said, they're really valuable, but they are kind of like the rearview mirror of your business. It has its place. It's really important to look back, see how we're doing, see how things are going. But if that's all you're doing, if you're driving only looking through the rearview mirror, you're not going to make it very long. We can use past data to make informed decisions of the road ahead. That's predictions, right? We can do forecasts. We can say, hey, based on what we've been doing, here's what I think we're going to do in the future. But ultimately, that's an educated guess on where we're headed. So looking in the rearview mirror, you can look back and say, Oh, I see all these things we've passed. That means we are, if the road is straight behind us, that means it's going to continue straight ahead of us. However, if you don't have a windshield, then you're not going to be able to see that curve that hits or the object in the road or whatever it is. Now, a money management system is the windshield in your car. That is your look ahead. That's the journey, the view of where you're headed. You can see in real time what's happening, what's going to happen, and where you're going so you can plan in advance. You see a tire in the middle of the road, you know, way up ahead. You have time to plan, react, and make sure you don't hit that tire laying in the middle of the road, right? That's what a money management system is for your business. And there is a reason the windshield is way, way bigger than that rear view mirror. Both are valuable, both have their place in the vehicle, but the windshield is the priority. If you don't have a windshield, you can't drive. If you don't have a way to manage your money to make real-time decisions in your business, you can't really run the practice for very long, at least not sustainably or effectively. So, how can we create a system? How can we get that money management system into our business? Well, I'm a big believer in finding a system that leverages your behavior. You know, we all are behaviorally attached to money, even if it's in your practice. If it's your business, I always like to say business is personal. You know, your personal emotions, your everything is tied to this practice that you started. And so behaviorally, we're going to engage with money differently. The way this typically shows up is when we have more money, we spend, when we have less money, we start freaking out and we tighten up our budget and we cut expenses or do whatever we need to to get by. It's that feast or famine. When things are good, we feel great. When things are not, we start to stress out and we start trying to figure out how we can make it through. It's this Evan flow that a lot of times causes burnout that causes us to give up or quit or really hate our job or skip our paychecks or not even take home enough of a paycheck when we do take one, it can have this ripple effect. So we recommend if you've if you've listened to my podcast um at all then before, then you know I'm a believer in the system of profit first. So profit first is a money management system that leverages that behavior. And we're gonna walk through four key principles of why this system works. If you don't know what profit first is yet, that's okay. Listen to this episode because I'm not gonna get into the weeds of how the system works, nor do you need to know the the details of how the system works. We're focusing on why it works. And so if what I speak of in this episode speaks to you, if everything I'm talking about resonates with you, then I highly recommend you go back. Uh, I believe episode two is one where we do a deep dive into Profit First System itself. Um, you can go to my website and research and learn a lot more about Profit First. You can give me uh shoot me an email if you want to know more about Profit First. I'm currently writing the book Profit First for physical therapists. So if you own a physical therapy practice, then uh I'll put a link in the notes below to uh get connected with that book so that you can get on the wait list for when it releases and get that info. There is a book by Julie Harris that is Profit First for Therapists. So my mental health therapist out there. Um fantastic book. I highly recommend it. I will link that in the show notes as well. So after listening to this episode, there's gonna be a wealth of resources for you to dig deeper. But I want you to hear the four core principles and see how they resonate with you and how you've been managing money and whether this is a resolution to what you've been looking for. All right, so the first principle of profit first is it relates to Parkinson's law, right? Principle one is just Parkinson's law. Now, if you're not familiar with Parkinson's law, it is a theory that work expands to fill the time available for its completion. In other words, you know, when I was in college, my roommate uh Mike and I were in the same classes. We're both trying to become teachers, so we were in education. And so we would get assignments and we'd be told, hey, you we have a project, it's due in two weeks from now. So we get that project. Mike was the type of person who the second he got home, he was going to start working on it, and he would spend the next two weeks working every day on it till it was time to turn it in. My personality tends to be the other way, and I wait till the night before to then start this project that I had two weeks to do. Ultimately, we both get the thing completed, him in two weeks, me in about eight hours, and we turn it in and to an extent get the same grade or the same results. Now, I'm not saying that's the best study habit. If your kids are listening in the car, kids don't do that, it's not not recommended. But as far as Parkinson's law goes, it's the idea of when you have more time or more of a resource, you're gonna consume it. That's how Mike engaged with the time to do the assignment versus me. I had less time to get it done uh when I chose to start doing it, I should say. I had only eight hours or so to do it, the same amount of work, and I was able to get that done. You know, it's the same thing with um and in the book Profit First, Mike talks about a tube of toothpaste where you know, when it's full, you're using a lot of toothpaste on your toothbrush. And then as the tooth gets empty, as the toothpaste tube gets empty, we squeeze and we find every way to get every tiny little droplet out and we make it work. If we have a lot, we use a lot. When we don't have a lot, we use what we have and we make it work. That's the idea behind Parkinson's law. Work expands to fill the time available for completion, or we expand to consume a resource. When we have more money, we spend more money. When we have less money, we spend less money. That is just how we behave. If you think back to uh your life and your personal finances, or even in your practice, you've probably seen signs of this. Maybe when the practice was doing really, really well, that's when you started buying new things for the office, or you started hiring, or you were invested in these new trainings or these new softwares. And then when money was tight, you cut your paycheck, or you cut these other softwares or these trainings, or you let go of somebody, or uh fill in the blank, or you took on debt, right? So when we have less of our finances, less resources to consume, we tend to consume less. So, how can we combat this? Well, we try and we recommend using multiple bank accounts. So basically, the envelope system for your business. This is separating your money instead of having one bank account that shows all of your money, you have different bank accounts for different things, so that when you look and you see you have a bank account nicknamed operating expenses, for example, instead of having all your money in one, you have a certain amount sitting in that account. It's gonna be less than your total amount available, it's gonna feel like you have less. So in turn, you're gonna spend less. Versus if you have one checking account right now, when you go to decide, can I pay this invoice that I just received? You probably look at your bank account, decide yes or no, do I have enough? And then you go spend. And then next week, when it's time to run payroll or cut yourself a distribution, there's not enough in the account. Or when it's taxes are due, you don't have enough to cover those. That's what's happening, is it's all in one. But when you separate them out and you have an account for profit and you have an account for owner's pay, and you have an account for taxes and an account for operating expenses and an account for payroll, then you can see each one and ensure that each one is getting taken care of. And if you're gonna go pay an invoice, you look at operating expenses and say, Yes, I can afford to pay it, knowing that you're not taking from the other that payroll is still gonna be covered, that your salary is still gonna be covered, that taxes are gonna be covered. When we have more, we consume more, or when we have the perception of having more, we consume more. If we perceive to have less, we're gonna spend less. The second principle is that sequencing matters. So I want you to imagine that you have this this health scare that lands you in the hospital and they, you know, they spend hours poking and prodding and do thousands of hundred hundreds of tests, uh, maybe thousands, who knows? Lots and lots of tests. And then a doctor walks in and sits next to your bed and pauses for a moment and tells you that unless you make some serious lifestyle changes, you're not going to be long for this world. Um, you get some paperwork, they tell you you're free to go, you step outside, and you look up in the air, you can see the sunshine and the birds chirping, and you just proclaim to yourself that you say, you know what, it's time I make my health a priority. From this day forward, I'm putting my health last. Right? It's a priority. I'm gonna put it last. No, we put what matters most from this day forward. I'm putting my health first. Well, in traditional accounting, the accounting systems we talked about, if you were to pull your profit loss statement or your income statement, profit is at the bottom. It is the last thing on the sheet. So if it's the last thing that we have, is that a priority? It's not. And so what we want to do is we want to flip that around. If profitability is a priority, which it should be, profitability is how you get paid. Profitability is how you grow, how you get create more jobs, how you can reach and serve more people. You cannot do that if your business is not profitable. There's only so far you can go, and if your business lasts at all, there's only so far it can go if it's not profitable. So if profit is a priority, then we need to flip that around. Instead of sales, which is at the top of the PL, the profit loss, it's sales, and then you have your expenses in the middle. So you take your sales, you subtract the expenses, and what's left over is profit. So sales minus expenses equals profit. We're gonna flip that around, and it's gonna be sales minus profit equals expenses. What happens first, what is a priority, is gonna get done. Now, the way we do that, we talked about having those bank accounts open. So you're gonna have an account nicknamed profit. And anytime money comes into the business or the practice, you're gonna move a certain percentage of it over to that bank account nicknamed profit. Now, at the end of the quarter, um, we'll talk about some rhythms you can get into and how you can take some of that money as a bonus. But that's the key, is we're setting it aside intentionally over in this account nicknamed profit. Moving forward, whenever money comes into your business, a percentage of it goes into that profit account. If you haven't dug into profit first yet and figured out what your percentages should be, start with one percent. And I say start today. Open a checking account, nickname it profit, start moving one percent of everything you make. 1% is literally nothing, you're not gonna notice it. If you bring in ten thousand dollars, that's a hundred dollars. So I think you can survive on nine thousand nine hundred dollars. If you can't survive on nine thousand nine hundred, then you couldn't have survived on ten thousand. So there's a bigger problem at stake. So one percent start there uh and then ramp it up slowly, but allocate a percentage to profit, and then from moving forward, you're going to be profitable. Profit comes first, we're prioritizing it, and what we put first happens. All right, so principle one was Parkinson's law. We consume what we have access to. Principle two was what happened. The sequencing matters. What we prioritize first happens, and now principle three is removing temptation. So, how can we remove ourselves from that temptation? Now, uh, you know, when I was teaching, I loved uh Coca-Cola. I was sodas when I was growing up, we had a whole fridge in the garage, literally a fridge, not a mini fridge, we're talking a regular fridge, uh, not no freezer, just 100% fridge that was filled top to bottom with different sodas. Uh, my friends in the neighborhood knew us as the soda house. You know, we were the place that people would come and they'd be like, Can I get a soda? And that's just what we drank. You know, I drank a lot of soda growing up, and then as an adult in my early 20s, soda, Coca-Cola, whatever it was, I was hooked on it. So you when I was teaching, that was my coffee in the morning. Then it was my mid-morning pick-me-up. I'd have one with lunch. I might have one, you know, mid-afternoon if I was getting sleepy around two o'clock. Uh, I'd have another Coke with dinner. So a lot of soda. And eventually, as you can tell, because you know, I decided to put my health first, I had to give up the sodas. I knew that they were not good for me. But the thing is, you know, we kept them in the house, and what I would find is when I would sit down for dinner, I would crave a soda. I would still crave one. And so we stopped buying them because I was having a hard time saying no. And once we stopped buying them, the weirdest thing was I stopped craving them. When I knew I didn't have access to two sodas anymore, I stopped craving, I stopped wanting it, and slowly but surely water became my go-to, and then now we can keep soda in the house and it doesn't bother me. Um but ultimately moving it away, removing that temptation was key. Now in our business finances, one, like we talked about, separating into the multiple accounts, but even further is removing that temptation is taking our profit and our tax money and our emergency savings, all of those and removing them one step further into a separate bank from where our business operates. One, when we open up our banking app to look at how we're doing as a business, we're not even gonna get to see how much we have in that profit account, tax account, or emergency savings account, right? So those are out of sight, out of mind. And when we don't see them, then we're not tempted to pull from them, we're not tempted to tap into it. We don't see a opportunity to grow the practice and think, well, I've got X sitting in profit, I could pull that out. No, it's because then we're no longer profitable. If we keep spending the profit on the business, then you don't have profit anymore. So we can remove that temptation, take it a step further, move it to a different bank. Finally, the fourth principle is to enforce a rhythm. Rhythms are the key to habits. If you're developing a habit, which is what profitability is, it's a habit, it's not an event, it's not a one-time thing. Profit is a habit, something that we are developing, that we're building, that we're practicing every day for the life of our business. Something that helps with that is those rhythms. So coming up with different rhythms in your business and how you're going to engage with that. So, for example, we talked about having the different accounts, getting into a rhythm of moving money through those accounts, dividing up what comes into the business into the profit account, owners' pay, operating expenses, etc. So once a week, if you say, you know what, for me, it's Friday mornings, every Friday morning, I sit down, I move the money through the accounts, I go and pay off any outstanding invoices, I zero out any charges that maybe got charged to the credit card this week, and I just get back to square one. And then next Friday I do the same thing, same thing. I get into this rhythm. So developing a rhythm of when you allocate money, uh, developing a rhythm I alluded to quarterly rhythms, and that is where you know you can take a profit distribution. So the money that sits in the profit account, it builds up, and at the end of the quarter, you could take half of what's that account for you. It's a bonus, it's money you get to take home, spend on whatever you want. Uh, what we always say is don't spend it on the business, it's for you. Whether if it's 20 bucks, then go get yourself a fantastic McDonald's dinner for two. I don't know, but celebrate it. Uh, sometimes we're using that money and we're thinking ahead, and it's you know, maybe I've in the past used it for water park tickets, we've used it to or water park season tickets, we've used it to put sod on our front lawn, resod the lawn, we've used it for appliances, uh, we've used it to fund, we went to Disney last year. So different things that the profit distribution can fund, but the key is it goes to things that are important to you, and that's once a quarter, you get to take what accumulates in there, take half out, the other half stays as a cash reserve. So it stays there to build up a cash reserve inside of the business. Another rhythm, so we got the that the weekly ones with the allocations, the quarterly profit. We also have the quarterly taxes. So if you pay your tax estimates once per quarter, you've got whatever money is sitting in that in that tax account. You can go and pay your tax estimates. Getting into these rhythms is really, really beneficial, really valuable. You can always look back at your accounting systems. And so the accounting system, please don't abandon it. You know, I know a money management system is key, so is an accounting. You still need to have your bookkeeping done, you still need something to submit for your taxes at the end of the year, and if you ever get audited, you need to have a paper trail. So please, please, please hear that me say accounting systems are super important, but a money management system is not the same thing. And if we are leaning on our accounting system to run the business and keep a pulse on the business finances, then there's probably and you're struggling, then that's probably the reason why is that they just don't line up. It's a mismatch. Most of us are not looking at our PLs and our cash flow statements and our balance sheets. Most of us are looking at our bank accounts. And since money is about behavior, that's what we want to leverage. We want to leverage that behavior of looking at the bank account to see how we stand and by creating a system inside of that bank account so that no matter what, anytime you look, you can see how do I stand in each of these categories. You're gonna have so much more control, so much more clarity, so much more confidence in your finances. I want you to take some action. I I talked about some links that I'm gonna put in the show notes to resources to help you dig more into profit first if you need to dig more into profit first. If you are familiar with it and you haven't opened your accounts, go open a checking account. Nickname it Profit. Start putting 1% into that account, and then shoot me an email when you do because I would love to celebrate the fact that you are purposefully profitable starting today. Thanks for joining us on the Therapy Business Podcast. Be sure to subscribe, leave a review, and share it with a practice owner that you may know. If your practice needs help getting organized with finances or just growing your practice, head to therapybusinesspod.com to learn how we can help.