Using Profit First in Private Practices

Using Profit First in a Private Practice

Are you aware of Profit First, but, unsure of what implementing it for your private practice actually looks like?

We jump into a quick demo of what Profit First is, then, we get into how to actually implement this system in your private practice.

Trust us, implementing this system will be one of the best business decisions you’ll make, both for your financial story and your mental well-being.

Please note: All “Profit First” names & ideas are from the “Profit First” Book by Mike Michalowicz. You can purchase it here:…)

The transcription of this video is below:

Why Profit First?

Hey, it’s Nate from Navigator Bookkeeping and I wanted to talk about Profit First today, which is a great book by Mike Michalowicz. If you haven’t read it, definitely check it out. It’s one of my favorite business books, and I highly recommend it.

But I wanted to talk about today how you could start to think about using this in a private practice. Now again, these are not my ideas, these are from Profit First. So, make sure you do read that book. It’s good to get the background behind why you’re doing what you’re doing anyways.

But what I found is that a lot of private practice owners have heard about Profit First. They maybe vaguely know about it, but they don’t know exactly what it is or what it means to implement it. So, let’s just talk a little bit about it and how we can use it.

What is Profit First?

So, the first thing to know about Profit First is just from a background. And I’m not going to get super in-depth here because like I said, read the book, or you can talk to a bookkeeper or an accountant who uses Profit First and learn from them as well. But the basic sense of it is that you have multiple bank accounts that you’re using to kind of plan for what your revenue is going to be used for.

So basically you’re kind of using these different bank accounts as like, smaller plates, is the metaphor used in the book, but smaller plates to divide up your revenue so that you’re not feeling like, “Oh, I have $50,000 in my bank account. I can spend that in all these things. But instead my $50,000 in my total bank accounts is split up amongst these different accounts so that I can use those for the correct reasons, whether that’s paying taxes, paying myself as the owner, saving, paying operating expenses, things like that.” So that’s the very, very basic sense behind it.

Implementing Profit First in a Private Practice

But I wanted to just look at implementation here for a second about how you can actually implement this in a private practice. So, starting off, we have the income account, which is this box at the top, and that’s where your income from all of your client payments is going to come in. This account is going to be used just for receiving income.

And I’ll just say, disclaimer here as well, I have many clients who do Profit First in different ways. They might do kind of like a Profit First lite where they don’t have quite this many bank accounts. They might do just portions of it. And that’s totally fine in my opinion. As long as you are saving and working towards implementing this more, I think that’s the important part. So anyways, just know that while you’re listening to this. But the income account is the top part.

Income Account & Contractors/Payroll Account

All of your income is going to flow into there, one hundred percent of it. That’s why it says a hundred percent. It’s all of your revenue is going in there. Now with most private practices, obviously you have a lot of costs going towards your therapists, right? Usually that might even be around 50 percent. It could be anywhere between 40 and 60 percent probably if you have a group practice. But let’s just say it’s 50 percent to make it easy with the numbers here.

So right off the top, 50 percent of your money is going to go and be set aside for therapist pay, because you know that’s going to happen every month.

Real Revenue

After that 50 percent is taken out, then we get to this box here, which is called real revenue. Real revenue is basically a term that Profit First uses. That means this is the income that you have left over after you’re paying everyone. This is really how big of a practice you are. In the book, they talk about what kind of size practice you are based off of revenue, so if you have $100,000 in revenue, it’d be a $100,000 practice.

Real revenue says to us, well, actually you’re not really a $100,000 practice. You’re actually a $50,000 practice because half of your revenue is just automatically getting paid to therapists every month. There’s no way around that. You need to pay your people.

So for private practices, we have this real revenue category that we often will use. So instead of thinking about our income as 100 percent, we’re actually dealing with 50 percent of our income after paying everybody. Now that we have that 50 percent income, I want you to kind of think of these next boxes as buckets that our revenue is going to drip through into. So we have 50 percent of our revenue. We’re now going to think of this as all of our revenue, 100 percent, because it’s 100 percent of what’s left over.

Profit, Vault, Tax, OC, OPEX Accounts

That 100 percent is going to get divided up into different accounts for different purposes. And this is where it gets cool. You’re going to send every month, Profit First would say twice a month on the 10th and the 25th of the month, you’re going to send your revenue based off these percentages. So if you have $100,000 in your real revenue account, you would multiply $100,000 by each of these percentages. So we’d send $15,000 to tax, $5,000 to profit, $5,000 to vault, 30 percent to operating, and $45,000 to owners pay.

Now, what are the purpose of these accounts? Let’s talk through those. The tax account is my favorite. This account is to cover your personal taxes plus any corporate taxes that your business has. So that means this is going to cover estimated taxes four times a year. This is going to cover any corporate tax that you pay at the end of the year. And this is also going to pay any personal tax that you have at the end of the year.

So for example, I’m recording this March 31st. I just paid my taxes for 2022. My tax account paid all of our personal taxes for my wife and I. Okay? Now, some of those personal taxes were from my wife’s work. They’re not all from the business. A lot of them were, but not all of them. The business still paid all of that tax bill. And that’s totally fine. We’re not saying that’s a deductible expense. We’re just taking that money out as a draw and paying it. But the business is still saving that money and providing that money. And it’s set aside.

What’s so cool about this is this money is set aside. It’s not getting used. It’s separate. You’re not going to forget about it. You’re not going to accidentally spend it, because it’s in a whole different bank account. Okay? That’s a tax account.

Profit is basically a quarterly bonus distribution you’re going to pay yourself. So 5 percent of your revenue is going to go into there.

Profit First would say you pay half of that full amount that’s in that account every quarter. And then the other half stays in there to kind of build up the balance and use as another kind of sort of savings.

The vault account is actually not usually used in kind of basic Profit First. It’s used in more advanced Profit First, but I do really like it just to help private practices build savings. This is kind of like an emergency savings account just to help you save for, “Yeah, crap, things are going really poorly.” “We lost a clinician,” or just, “Hey, we want to expand,” or, any of those things. So set money aside just to prepare yourself for emergencies. That’s what the vault is.

Opex is operating expenses. This is going to be the one that’s going to be the hardest to stay within those margins. By the way, in Profit First, there’s an assessment you can do called the instant assessment to kind of determine what your percentages are right now and what they should be. So I would recommend trying that out.

The Opex is the one that’s going to be the hardest to keep at that 30 percent number. But remember, this is after you’ve paid your clinicians already, your therapists. So that should make it a little bit easier. But yeah, basically 30 percent is left to pay rent, utilities, software, advertising, all those things.

And then owner’s pay is pretty self-explanatory. That is going to be used for paying yourself as the owner. So whether you are paid through payroll as a W-2 in the company or whether you’re paid through distributions, either way, that is going to cover that cost for you.

Profit First Workflow

So basically thinking about this as a whole, as a workflow, every month of the revenue is going to get deposited into the income account. You’re then going to transfer it to the therapist pay account, into the real revenue account. And then from there, you’re going to transfer it out to these other sub accounts, so you’re going to have a lot of bank accounts.

Now, that’s not a bad thing. If we learned anything from the Silicon Valley Bank fallout, it’s that you don’t want all your eggs in one basket. You don’t want all of your accounts at one bank and you don’t want all of your money in one account. Even if something like fraud happens, it’s nice to have money in a couple of different accounts so that if someone fraudulently uses your account, steals a bunch of money, you have money in other places that you can still use. You’re not stuck.

So, it’s good just for that reason. This may feel admin-wise, like a lot of accounts to open, and that may be true. But as long as you find a bank that’s not going to charge you monthly fees, this is pretty doable. So that’s what you’re going to do.

Now, let me show you one more thing. If we go to this screen, you’re going to see just a chart that we use for our clients just to help them calculate their Profit First percentages. So this is the same thing that we’re seeing on the other page, but just broken onto a spreadsheet so that all these amounts automatically calculate.

So what you would do if you’re using this is you would enter in your real revenue in column B every month, and then these formulas here are going to automatically pull out how much you should send to each account. So of the 12043, here’s the amounts we would send to each of those accounts. This makes it really easy because all you need to do is type in your revenue once a month or twice a month, and then you just pop formulas, pop the amount right back in, and you know how much to transfer over to your accounts.

Now, what you’ll find likely, and this is a good part about Profit First, is it can be flexible. What you’ll find is that a lot of these accounts may not work for you. So you might say 3,600 for operating expenses. Well, it turns out I have $6,000 in operating expenses. That tells you, you maybe need to take a look at operating expenses a little more closely.

Figure out, is everything we’re spending in operating expenses things that we actually need to be spending on? And it could go the other way as well, right? You could be saving $1,800 for tax, and you could quickly realize that’s going to be too much. So there’s adjustments you can make, and that’s a part of it. But the most important thing is just to start.

Just start doing it, try it out, implement it. You’re going to run into issues. It might be messy, but this system is single-handedly, in my mind, what’s going to be one of the biggest mind shifts for you as a private practice owner. Because this is going to lead you to having money saved up for taxes, for emergencies, and it’s also going to give you a bonus every quarter.

But really above all that, it’s going to give you a really easy look at where your money is and how you’re spending it. And it’s going to give you some quick kind of dashboard health indicators of how the business is doing financially. So, highly, highly, highly recommend you to read the book, to implement this, and to check it out.

And if you have questions, I’m here for you, I love Profit First, love talking about it. So leave a comment below this video, reach out to us on our website or email, and we’re happy to answer questions as well. But either way, just start trying it. It’s not going to be perfect, but that’s business, it’s not perfect, you got to just start it. So, good luck. We’ll talk later.