The four financial numbers you need to understand in your practice to do your best work
I want to talk about the 4 financial pillars that you need to be familiar with in your practice, because as this tax year comes to an end and the new one begins, you might be looking at your numbers and thinking how did that happen? Maybe you got a tax bill that's bigger than you were expecting. Maybe you are getting to the end of the year and realising that you didn't make as much money as you wanted to, or maybe it's more positive than that and you've got a bigger tax bill than you were expecting because you made more money than you wanted to.
Full show notes for this episode are available at The Business of Psychology
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ShownotesRevenue
Revenue is the simplest metric in your business. It’s gross income, the money that is coming in with nothing deducted. On its own it’s a vanity metric. I see lots of people sharing their revenue without being honest about the other numbers, and it troubles me, because the revenue in your business can be very high, but the other numbers in the business will change as a reaction to that revenue. It's the other numbers that give us much more crucial information about the health of the business and the lifestyle that it's actually going to give you, and the good that you're able to do for your clients.
Revenue is important to know because it gives an estimate of growth and impact. If you are making a lot of revenue, it's likely you’re helping a lot of people and you can track the trajectory of that. Tracking your revenue should include tracking the specific sources of that revenue. Go into a bit of detail, looking at how many therapy sessions, online courses, and supervision sessions you are selling, and breaking it down into individual services that you offer so that you can see how much money you are making for those activities each month. This is helpful because it allows you to predict what might happen in the future if you put effort into increasing revenue in one of those areas. It’s important to know exactly where that income is coming from. If you're very busy, you might not realise that you are doing more supervision than you were last year, and that a bigger proportion of your income is now coming from that. Even if that overall revenue figure hasn't changed much, the place it's coming from might have changed, and for tax reasons it can be significant to understand that.
It's up to you how many categories for different types of revenue you want to create. Go with what's useful for you to have a good understanding of your revenue. For associate practices, you might want to break it down by associate so that you know how much money each associate is making you each month. If you have a really large associate practice, that might be cumbersome and you might break it down into your therapy income and associate therapy income. What I would say is that if a service has specific expenses attached to it, then have that as its own line so that when you do your expenses, you can do some spreadsheet wizardry and make those things dependent on each other.
For example, if you've got an associate practice and you know that for every £140 an associate makes you, you are going to pay out £90 to them, you can create a formula in your spreadsheet that calculates an expense line to take £90 for every £140 that is listed in the income for an associate. It’s definitely worth separating out your services, at least in that much detail. Revenue tracking and getting granular with it can help you to see which aspects of your business are really healthy and which ones might be declining or struggling.
Expenses
You need to consider this alongside revenue. You need to know how much money you are spending every month in order to keep your business running in the way that it needs to support your lifestyle, and you have to be honest with yourself about it. People always ask me for an estimate of how much the expenses should be for an independent practice, and I can't give one because it depends on your values, the services you are providing, what that client group needs in terms of support, and what you need in terms of support. This is why I would never share my revenue figures with you because if you saw them, you'd get a false impression, because in order to keep my business going with all the stuff that I have going on in my personal life, I have to pay for a lot of support. You can't look at somebody's revenue figure and have any idea about what their overall take home pay is going to be, because you aren't going to have a realistic impression of their expenses. Don't be impressed by those online gurus who share their revenue figures with you. I think that's irresponsible unless they're also willing to share the expenses and profit.
When looking at your expenses, I recommend getting your banking app out and dumping this into a spreadsheet. If you are in Startup or Evolve and Thrive or the network, you'll have access to our Cashflow Forecast spreadsheet. You go through your banking app and literally note down all the expenses over 3 months, accurately transposing them into the spreadsheet. Then go back through the year and see if there are any big expenditures which don't go out every month that you make on an annual basis and pop those in. This is really boring, and if you have a bookkeeper, it may be that they can do this for you, but it's worth doing because once you've got that, you can categorize your expenses and have a look at what expenses are investments in either the quality of your service or in the growth of your service.
I invest in stuff like practice management software because that creates a better quality service for me and for my clients, and I invest in advertising spend, and that's because I expect that will enable the business to grow. Those are both investments in quality and growth, so they go in the investment side.
You may find that there are some expenses which don't easily fit into a quality or growth category. When we have those expenses we need to consider whether they are adding another kind of value or are they draining the business? Often I'll find that I've got software packages that double up. I could be using one tool to do lots of things, and actually I'm using lots of tools and paying lots of subscriptions. I would highlight that and think about reducing those. It's a really useful exercise because not only are you getting to know this number, which is really important for planning your business going forward, but you're also getting an idea of what you could cut.
Things that fall into the investment category are clinical supervision, business coaching, high quality legal templates, practice management software, CPD, training that you're going to be able to use to support your clients better. You're looking for anything that sits on the periphery that you don't use often or you don't use very well, and thinking about whether it might be time to cut that.
Once you've done both those exercises and you've put them into your cashflow forecast spreadsheets or a spreadsheet to track your income and expenses, then you see what the gap is between the two.
Tax
Tax is something which can be confusing. I was told a lot when I started in business that it wasn't confusing, but I think it is confusing, especially considering it's not something that we are taught in school. So, I'll give you a really brief overview of the taxes you need to keep an eye on. You should consult an accountant to get proper advice on your tax situation. If you are in Startup or Evolve and Thrive or the network, we have a class with Mahmood Reza
