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Episode 78

Mastering Profit First Accounting

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About this episode

Hi,  I’m thrilled to have you back with us. In today’s episode, we’re diving deeper into the Profit First system. If you tuned in last week, you’ll remember we discussed using multiple bank accounts to help manage and control your spending. This week, we’re taking it a step further by exploring categories and something called CAPS and TAPS.

I’ll start by sharing an inspiring story about a client who turned her business around using these principles. She faced significant challenges with her staffing model and overheads but made incredible progress by implementing the strategies we’ll discuss today.

Summary:
In this episode, we delve into the details of the Profit First system, focusing on how breaking down your finances into smaller, manageable accounts can lead to better financial health for your business. We cover the concepts of CAPS (Current Allocation Percentages) and TAPS (Target Allocation Percentages), and how they can be used to streamline your expenses and increase profitability.

I also share real-life examples and provide practical advice on how to start implementing these changes. Whether you’re a solopreneur, a small practice, or managing a large group practice, this episode offers valuable insights tailored to your business size and needs.

Key Takeaways:

  1. Understanding Profit First: Learn the basics of the Profit First system and why multiple bank accounts can help manage your spending.
  2. Client Success Story: Hear about a client who transformed her business by cutting overheads, streamlining admin processes, and reducing unnecessary expenses.
  3. CAPS and TAPS Explained: Discover what CAPS and TAPS are, and how they help you set financial targets and allocate resources effectively.
  4. Practical Implementation: Get practical tips on how to implement the Profit First system in your business, from setting up accounts to determining your target percentages.
  5. Overcoming Resistance: Learn how to deal with the overwhelm and resistance that often come with making significant financial changes.
  6. Tailored Advice: Advice for different business sizes, from solopreneurs to large group practices, ensuring relevant tips for everyone.
  7. Future Insights: Preview of an upcoming episode featuring Annette, a Profit First accou

Resources:

This podcast is sponsored by the team at HMDG

Highlights

Transcription

Treat Your Business EP78

[00:00:00] Katie Bell: We are back talking about the Profit First system. Last week we talked about using several bank accounts to trick ourselves into spending less, just as we would do, or I would definitely do, when we are trying to be on a diet. You basically serve yourself off smaller plates, so you have a better sense of what you have to spend in each of those categories.

[00:00:24] Katie Bell: When you have smaller accounts to work with, it may feel like there isn’t quite enough for what you need or what you want. But that’s the whole point. That is normal. And, it’s going to help you get a little creative in how you cut your expenses or increase your revenue. Today, I’m going to cover these categories and also something called CAPS and TAPS.

[00:00:48] Katie Bell: If you don’t know what they are, stay with me and join me for this episode.

[00:00:52] Katie Bell: I’m going to start with a little story of a wonderful client of ours who has been with us for, actually, maybe this is her third year of coaching now. But when we first started to work with this lady, it was very clear that her business model Her staffing model, her numbers were not serving her at all.

[00:01:13] Katie Bell: She was taking some money out the business, but it was what was left. It wasn’t enough to serve her lifestyle and her husband or husband to be, and her little girl and the things that they wanted to do with their life, but she was working her. Bits off. She was doing loads of hours. She was doing all the clients.

[00:01:31] Katie Bell: She was trying to manage the team. She’d got team coming and going and she’d got people that had been with her a while and were taking a massive percentage of the gross revenue. This lady got really serious about cutting her overheads, streamlining her admin processes and reducing overall spending.

[00:01:52] Katie Bell: There was no stone that was left unturned. She reviewed all her marketing and cut any spend on things that weren’t generating leads in her business. She looked at all of her admin processes and how they could streamline and automate those to reduce how much she was paying an administrator. One of the biggest things that we noticed is she was spending way too much money on CPD and it wasn’t moving the needle in her business.

[00:02:22] Katie Bell: Just by getting, having more, doing more courses, getting more qualifications doesn’t mean that you are going to be charging significantly more in your business and ultimately making more profit. The other thing that we noticed is that she, that team would be wanting to go on courses, but then there was nothing there to protect her if they left.

[00:02:43] Katie Bell: So we had to look at something changing in her contractual agreements that if a team member was to leave within one year or two years, there was a hundred percent or 50 percent payback. And as I mentioned, the percentage split of some of these individuals within the business was meaning that actually when we deducted the overhead expenses and the administrative costs, of running her business, she was paying them to work for her.

[00:03:10] Katie Bell: With her eye on the bottom line, she was able to slash her budget in a few short months. She got very clear on her financial targets in each category. We got clear on what that owner’s pay needed to look like in 12 months time and what the profit needed to look like in the business, which then allowed her to look at her allocations, these different pots that we talked about in previous episodes.

[00:03:38] Katie Bell: I tell you that story to inspire you that if you are sat here now and everything that I have talked to you over the last few weeks, and I’m going to talk to you about over the next few weeks can make us feel, we can have a lot of resistance that we can have a lot of overwhelm when it comes to numbers.

[00:03:53] Katie Bell: And we want to bury our head in the sand, just consuming these podcasts is not going to move the needle in your business. It’s not going to change things. You actually have to go and implement. Now. If you don’t want to spend time figuring this stuff out for yourself, like I get it, I’m that person as well, then go and get yourself a Profit First accountant.

[00:04:11] Katie Bell: And guess what? In a few weeks time, I have a Profit First accountant coming on the podcast to talk to you. She is incredible. Her name is Annette from Annette Co. and she runs the Profit First accounting model. Hey, you can just go and ask her to implement this in your business and help you do this.

[00:04:29] Katie Bell: But I want to inspire you that if you are feeling like there is never any profit left, there is never any money at the end of the month, then some things have got to change. And that’s what we are here to do. So we talked last week about your foundational bank accounts, didn’t we? We said that you really can’t just have one bank account where everything’s coming in and everything’s going out.

[00:04:49] Katie Bell: So you might now be wondering how much money, Katie, do I transfer into each of those accounts? And This is dependent on your practice size. And it’s depending on your tax allocation. Every business owner will be slightly different in terms of what they need to allocate for tax based on their personal circumstances, business circumstances, blah, blah, blah, blah, blah.

[00:05:09] Katie Bell: So I’m going to give you some rough ideas on this podcast today. Okay. But remember, this is about You starting to recognize what things need to change in your business and then being able to find somebody that can help you do this is key. So one of the questions that I get all the time is Katie, what is a normal amount?

[00:05:30] Katie Bell: Like what, how are other practices doing? What do a practice of my size Like, am I different? Am I the only one that doesn’t feel like they’re making any money? And I’m going to encourage you to think about this in two ways, is that this is not about saying, I’m going to give you the TAPs, the Target Allocation Percentages, for the 5 percent of the high performing clinics that are in the UK.

[00:05:56] Katie Bell: No. This method These allocation percentages are tried and tested. They work in my clinic and they, these are for the 95%. These are for everybody. But I also want to challenge you on this is that, are you gonna be the 95% of people that don’t change anything, that don’t implement a change to your accounting or don’t look at the Profit First model, because that’s the reality.

[00:06:26] Katie Bell: One of our values in Thrive is to be the top 5%. And when I think about that as a value, this is about doing things that other people are not prepared to do. This is about listening to podcasts and actually going to implement the stuff that you’ve learned. This is about being consistent in your approach.

[00:06:43] Katie Bell: This is about looking at what makes the top 5%, the top 5%. How do they behave? How do they act? How do they think? What do they believe? I can promise you, if you are in the top 5 percent of clinics in the UK this stuff will be happening. But it’s for everybody. You don’t have to get there to implement it.

[00:07:03] Katie Bell: This is about implementing it now. So we’ve got to look at this in, for all of our listeners here, I’m going to have some of you listening that are solopreneurs, there is just you in your business and your revenue will range from anywhere from zero to 200, 000. Then we have a small group practice which might be a hundred, like you and one other clinician, maybe a part time VA or maybe a couple of clinicians part time, and you will be around a hundred to three hundred thousand revenue.

[00:07:40] Katie Bell: And then you’ve got your medium group practices, which will be again, roughly five to eight clinicians, a couple of administrators, you might have somebody acting up as a practice administrator you will still be doing quite a lot of the clinical work, and you might have a revenue of, 10, 000, 000.

[00:07:55] Katie Bell: Around 300 to 600, 000. And then you’ve got your large group practices. They may, you may have multiple sites. You may have 10 plus team members. You may have a full time ops manager, practice manager. The business owner themselves is not really doing any clinical revenue or very little. And they will be up at sort of six, 700, 000 to the seven figure mark.

[00:08:19] Katie Bell: So I’m going to give you examples of these TAPs. Because it’s really important that you start to see what the end goal is. This is not where you are going to be now. And I want to, I’m going to, I’m going to say that again. Okay. This is not where you are going to be now. Your caps, your current allocation percentages, your target allocation percentages, Is about seeing this as a destination.

[00:08:52] Katie Bell: It’s about seeing what you could achieve, being excited that there is a different way of doing things. So I’m going to give you not all of them because that would be a really boring podcast episode if I just read this whole table of percentages out to you. But let’s just look at some of the key ones.

[00:09:11] Katie Bell: So as a solopreneur, just you, I know I’ve got lots of listeners that are just them. Your operating expenses. This is without your payroll, okay, because generally you won’t have any payroll. You might have a tiny little bit of proportional payroll for admin, like five percent, but your operating expenses will be anywhere between 10 and 40 percent.

[00:09:31] Katie Bell: Okay, no more than that. If your operational expenses are more than that, it’s got to change. And therefore your payroll, so your owner or owner’s pay, will change. will be 30 to 60%. Tax anywhere between 5 and therefore your profit 5 to 15%. So that’s for you guys working on your own. Small group practices, so those of you who’ve got maybe two or three part time staff, maybe a part time VA or very little administrative team, Your operating expenses need to be between 15 and 35 percent.

[00:10:11] Katie Bell: We then have payroll, which needs to be between 25 and 45 percent, depending on, again, the size of your practice. Your owner’s pay needs to be anywhere between 10 and 30 percent, tax 5 to 25 percent, and profit 5 to 15 percent.

[00:10:28] Katie Bell: So for sole openers and small group practices your operating expenses sit a little bit higher as a whole because your payroll, therapist, admin, leadership percentages are low. Your owner’s pay is sitting a little bit higher and your profit is sitting a little bit higher than a median group or a large group would be.

[00:10:55] Katie Bell: So if you’re a median group, so we’re somewhere around 300 600, 000 pound revenue, your operating expenses need to be 10 to 25 percent. Then you will have 45 to 60 percent of payroll, that’s for your therapist. You want about a 10 percent maximum admin on your payroll. Your owner’s pay will be 5 10%, your tax will be 5 15%, and your profit will be 5 10%.

[00:11:20] Katie Bell: And then your large group, that’s your kind of 700, 000 to multiple six seven figures. Your operating expenses need to be sort of 10 18%. Your payroll for your therapists are going to be 45 60%. Your biggest cost as a business as you grow is going to be your staff. Your admin will be anywhere between 4 7 percent on your payroll.

[00:11:43] Katie Bell: Your leadership payroll, you, gets 3 5%. Your owner’s pay, same 5 10 percent as a median group practice, tax 5 10 percent and profit 5 10%. What we’re talking about here is your operating expenditure. Okay, for all of you, you have that. This is the amount you allocate for general overhead expenses, such as your rent, your utilities, your software, your subscriptions, your education, professional fees, advertising, office supplies, etc.

[00:12:12] Katie Bell: Your payroll for your therapist. This is the amount you allocate for wages, payroll tax, benefits for your clinicians, employees, and contractors. This does not include your wage if you are on payroll, even if you do the clinical work. Payroll for your admin. This is the amount you allocate for wages, payroll, tax, and benefits for your admin, employees, or contractors.

[00:12:36] Katie Bell: And then you’ve got payroll for leadership. This is the amount that you allocate for wages, payroll, tax, benefits for your leadership team, like a clinical director, a clinical supervisor, a site supervisor. The po the portion of their wage that is clinical should be allocated to the payroll for therapists.

[00:12:55] Katie Bell: So for example, we will have a we will have a, one of my clinical leads. She has a proportion of her income, which is made well, a proportion of her hours. is clinical work. She sees patients, okay, and I can see then what her profitability will be, her, her expenditure will be based on the number of hours that she can see patients for.

[00:13:20] Katie Bell: But there will also be supervisory hours, business development hours that you, that we can allocate. into this section because you can’t directly see the direct remuneration from that. That, you have to look at that in a different way. And then you’ve got your pay, your owner’s pay. So this is intended to cover your personal living expenses.

[00:13:42] Katie Bell: This is going to depend on how your tax works. If the owner’s not on payroll, this is the amount you’ll allocate for regular owner’s drawings. This amount will be available for you to transfer to your personal bank account.

[00:13:57] Katie Bell: And then you’ve got your tax. The percentage of revenue that your business will save to pay taxes on your behalf. And then profit. The percentage that will be allocated for profit. You’ll notice there’s three allocations that directly benefit you here. Payroll, for the owner, tax and profit. These benefit you directly or indirectly.

[00:14:19] Katie Bell: The rest of the categories support your practice. They’re all important and the Profit First model allows them to co exist in this harmony. Now remember with your tax TAP, your target allocation percentage, there’s no one size fits all. Tax calculation, because every person’s tax can vary significantly based on their personal financial situation.

[00:14:43] Katie Bell: So you need to confirm with your accountant how much you should be saving.

[00:14:49] Katie Bell: And I want to go back here to say that you’re going to go through an emotional cycle of change here. You’re going to feel, Oh my God, this could be really exciting. That I could be making This business more profitable. I could be protecting income drawings coming to me. That’s consistent each month.

[00:15:07] Katie Bell: I could still have profits left over to reinvest in the company or to grow. I could have all my money set aside for payroll, for my therapist, for myself, employed people, because there will be a frequency of transfers that you make, which means that becomes protected. But You’re going to be completely overwhelmed.

[00:15:26] Katie Bell: This is going to be one of those things that you put in the, on the later base, let me call it, where you don’t really do anything about it. And then when the next tax bill comes around, you think, Oh shit, I really should have implemented that profit first model. That katie was talking about one of those podcasts ages ago.

[00:15:42] Katie Bell: But I want you to start where you are and slowly work up. It’s about working out now what your current allocation percentages are, and then the destination. And then we tweak, and we refine, and we cut costs, and we look at scaling, and we look at automating, and we look at changing the staffing model. But it all starts from really setting that SATNAV.

[00:16:05] Katie Bell: Now, if you’re a listener who is a start up practice, or maybe you’ve not even started your practice yet, I am always alarmed. Alarmed, is that the right word? I’m alarmed about the number of people that seemingly seem to be setting up their private practice having just left university. And I think, do you know what?

[00:16:28] Katie Bell: Fucking good on you, because you’re a risk taker. It just makes me feel slightly anxious because you’ve spent three years learning about the elbow and the knee and the shoulder, but you’ve learned absolutely nothing about running a business. So what I would like to say to all of you startup listeners.

[00:16:43] Katie Bell: For people that are thinking about starting up, you’ve got to have some form of initial investment. You’ve got to think about first pot of money to get you off the ground. I’m not going to say on this podcast how much that needs to be. I certainly know what my investment was when I first started, but what you can’t do is try and cash flow your way to success.

[00:17:07] Katie Bell: You can’t open the door, start seeing a few clients, start making a bit of money and then think that’s how you’re going to grow your business because it’s going to be really slow and it’s going to be really tiresome and really exhausting and you’re constantly going to be robbing people to pay Paul and not really paying yourself any money.

[00:17:22] Katie Bell: So you can implement the profit first model from the first pound that you make in your business but that does not include your investment stake. Your investment stake is not taxed. It’s not for you to take profit from. It’s not for you to have a salary from. This is like the investment that you need to get your practice off the ground.

[00:17:42] Katie Bell: And I know that you’re all going to be skeptical as to whether this works or not. I can promise you from experience, this works. I run it in both Thrive and my physio and wellness clinic. It is transformational.

[00:17:53] Katie Bell: Now you are going to get to speak to a Profit First expert on the podcast coming up very soon. I urge you to be around for that episode because she’s going to answer some of the questions that we get asked a lot when it comes to Profit First, but it’s also introducing you to an expert. I only know this stuff because I went and found an expert that could do it for me.

[00:18:16] Katie Bell: And then I learned the stuff because for me to teach it, I need to learn it. I need to understand how this works in my business. I need to understand what I’m measuring, what I’m tracking, what I’m working towards, what the destination is. So next week, I am going to be bringing Annette from Annette Co.

[00:18:34] Katie Bell: onto the podcast. Make sure that you are here for it because it’s going to be an awesome podcast. But before you go, I have to give you this very special offer. If you are a team member listening to this, thinking this is the biggest problem for me, my team are not performing, therefore they’re not retaining, they’re not converting, they’re not giving me the profits that I need to make.

[00:18:57] Katie Bell: A, because I’m giving away too much of my percentage. or gross revenue to that member of staff, but equally it might be that you have employed team that aren’t busy enough. There’s too much downtime, too many gaps in the diary. They’re not seeing the patient enough times for it to be a profitable transaction.

[00:19:16] Katie Bell: Then I would love to invite you to send some of your team on our therapist transformation course that is coming up on the 13th of June. 2024, depending on when you’re listening to this is where they get to spend a whole day on Zoom with me, and I performance manage them on your behalf. As the practice owner, I know you guys don’t want to have these conversations.

[00:19:36] Katie Bell: I know you don’t have time to have these conversations. I know that you feel when you do have these conversations, you’re like on tiptoes. Everybody’s sitting on the fence. Nobody’s really saying what they need to say. And there’s some open and honest conversations that need to be had with your team with a lot of love, of course, from me and a lot of encouragement and giving them the confidence that they need.

[00:19:56] Katie Bell: But I am going to help them get themselves out of their own way when it comes to having direct conversations with clients about what is in their best interest to get the results and the goals, achieve the goals that they want. How to up level their money mindset, because that’s one of the biggest barriers.

[00:20:12] Katie Bell: They often think that what we’re charging is too expensive. Or they don’t fully lean into the value of what we deliver. They don’t fully believe that we transform lives. So they just block themselves. They get themselves in the way. They feel salesy. They feel like they can’t have those direct conversations.

[00:20:29] Katie Bell: They also don’t understand the numbers. They don’t get that the 100 quid that you charge a client for an hour’s initial assessment or the 50 pound follow up is not what you’re putting in your back pocket. I tell them that. I explain. I show them percentages. I use the profit first model. I explain. So this is how it looks.

[00:20:47] Katie Bell: This is actually what’s left before your owners even take anything. So it’s really important to protect the business. Because if the business is going to be here to serve you as a employee, it’s got to be profitable. So I have those really direct conversations. I up level their confidence. I teach them consultative selling.

[00:21:06] Katie Bell: And we see the difference day one. The next day they come into clinic, they’re converting, they’re retaining, they’re having direct conversations. And then over the next three weeks, we have accountability calls. Them on track and really to embed those new habits. So you are gonna see that massive transformation now in celebration of my 10 year birthday within the clinic.

[00:21:26] Katie Bell: And to celebrate my super high performing team and give your team and you the opportunity for them to be coached by me, then we are giving you the opportunity to send somebody on this course with a 500 pound discount. Yes, 500 of the total cost of the course. For June only. There are very limited places left.

[00:21:52] Katie Bell: In fact, I don’t even know if there’s any places left when I’m recording this because It has been super popular. We don’t have a massive cohort because they need to get all of me and I need to be really engaged with them all to get them the best possible results. Head to the link in the show notes where there is going to be a link that you can click on, find out more.

[00:22:12] Katie Bell: There’s a little video for me explaining more about what this course offers and how it’s going to transform the results in your practice and make you more profitable. That is what we are here to do. Sound good? Okay, make sure you head there now. Thank you for joining me on this week’s episode. Make sure you join in next week for our guest slot with Annette from Annette Co, where she is going to be talking a little bit more and wrapping up this month about profit first.

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